Bankers said yesterday that Peter Burt, the chief executive, had talks with David Prosser, his opposite number at L&G but felt a deal with L&G would take the Scottish bank in a direction that he did not want to go.
NatWest, which is fighting to avoid being taken over by BoS, will almost certainly seize on the news as ammunition to use against the rival bank.
Mr Burt has based his audacious pounds 22bn bid for NatWest on the argument that bancassurance - mergers between banks and insurance companies - is "an untested model in the UK".
Dismissing NatWest's pounds 10.85bn bid for L&G, which the BoS bid has killed, he said in his aggressive presentation after launching the bid on Friday that "you don't need to buy the cow to sell the milk". One analyst said yesterday: "The trouble is that those remarks come back to bite you."
BoS refused to comment on its talks with L&G. However, one banking source pointed out that NatWest's problem was not so much that the idea of selling insurance through bank branches was fundamentally wrong, but that its management lacked the credibility to be trusted with executing a strategy that had not yet proved itself in the UK.
Shares in the banking sector saw profit-taking yesterday as the market began to adjust to the prospect that the battle for NatWest is likely to be a drawn-out affair.
BoS was seeing institutions and is scheduled to present what are widely expected to be good half-year results today, but analysts said they thought it unlikely the bank would be ready with its offer document for at least another week.
Royal Bank of Scotland (RBS) is trying to outflank BoS by pulling off a friendly deal with NatWest but is unlikely to be in a position to to make its move until well into next week. Abbey National yesterday confirmed it was watching the position closely, although bankers believe it is more interested in picking up some of the fallout than becoming embroiled in a messy bid battle for NatWest.
Continental European banks yesterday lined up to rule themselves out as potential "white knight" bidders.
Jan Kalf, the chief executive of ABN Amro, the Dutch bank, told the Dutch media that to justify a bid "there must be clear advantages as regards profitability and I don't see those there".
Bernhard Walter of Dresdner and Rolf Breuer at Deutsche Bank also denied any interest in UK retail banking.Reuse content