Royal Bank of Scotland has moved to prepare a hostile £26 billion sterling (€41.3 billion) takeover bid for National Westminster Bank Plc after NatWest rejected a friendly approach on Saturday.

Royal Bank, which believes it can achieve hefty cost savings by merging their two British banking networks, would launch a hostile bid today, sources close to the process told Reuters.

Royal Bank's strategy for Ulster Bank is unclear. Both Bank of Scotland and NatWest said they would sell Ulster Bank. Irish Life & Permanent and Bank of Ireland have made a joint indicative bid for Ulster Bank. AIB has made an indicative bid.

NatWest's defence document does not pick out Ulster but said there was substantical interest in its divestments.

The Royal Bank bid is expected to beat the hostile bid for NatWest already on the table from its Edinburgh-based rival - Bank of Scotland.

Investors expect Royal Bank's bid to be the winner, as it has potentially greater cost savings to offer than Bank of Scotland and is likely to have a higher cash element in its bid, thanks to the backing of its 9.6 per cent shareholder, Spanish bank Banco Santander Central Hispano.

Royal Bank has some 600 branches, of which 308 overlap with NatWest's network in England. Bank of Scotland has 30 overlapping branches.

If successful, the merger would see a bank with £82 billion of assets take over a bank with more than twice the market value and £185 billion of assets.

NatWest chairman Mr David Rowland confirmed NatWest had rejected the friendly approach at a news conference to detail its own plans to battle on independently against the Scottish attacks.

Newspapers reported yesterday and sources confirmed that Royal Bank had approached NatWest with a bid worth £26 billion or £15.78 a share.

The bid was made up of one Royal Bank share and 250p cash for each NatWest share, the sources said.

This trumps the hostile Bank of Scotland bid currently worth £15.77 if a special dividend is included and £14.57 if it is excluded, as many analysts say it should be for comparative purposes. It also exceeds NatWest's own closing share price of £15.18 on Friday.

"They have put a proposal to us," Mr Rowland told a news conference detailing the group's final defence against Bank of Scotland's bid. "The board considered that the proposal did not justify a recommendation from the board," he said.

Mr Rowland would not comment on the size of the proposal or exactly why it was rejected. He said he would wait for Royal Bank to put its proposal formally before commenting further.

But he said NatWest had no objection in principle to an agreed takeover, but that the board was interested only in maximising value for shareholders and would fight on if necessary to achieve that.

Mr Rowland and his righthand man, chief operating officer Mr Ron Sandler, said their continued involvement in NatWest was not at issue in any deal.

Mr Sandler said Royal Bank had offered to allow him and Mr Rowland to stay on, but that he had told Royal this should not be considered.

The besieged bank set out its final defence against the hostile bid from Bank of Scotland just before midnight on Saturday, promising cost cuts of £525 million by 2002 and £2 billion pounds worth of share buy-backs.

This is below the total cost savings estimate Bank of Scotland has made of £1.015 billion. Mr Sandler said NatWest's profitability or return on equity from its core operations was 26 percent in the first half of 1999, above Bank of Scotland's 21 per cent.

Bank of Scotland said NatWest's final defence suggested it had "thrown in the towel."

"Its 11th-hour final defence is painfully lame," Bank of Scotland chief executive Mr Peter Burt said in a statement.