A statement confirming that the two institutions are in talks is likely to be made today, although City sources said last night that a number of details needed still to be finalised and that a deal is still some days away.
The offer is expected to be pitched at around pounds 2 a share against a closing share price last night of 192.5p up 17.5p.
The deal, if he succeeds in pulling it off, will be a substantial boost for Derek Wanless, the NatWest chief executive who has been working hard to rehabilitate the bank in the eyes of the City following the investment banking losses which led to the sale of NatWest Markets more than two years ago.
Mr Wanless has been open about his ambition to expand the group in the life and pensions market, which he believes will be a major source of quality earnings for the group.
The potential deal comes less than three months after Lloyds-TSB, NatWest's high street rival, tied up the pounds 7bn takeover of Scottish Widows, the Scottish mutual life-insurer, in a move which was warmly welcomed in the City. L&G is highly regarded in the City after having turned itself into one of the lowest producers in the life insurance business at a time when costs are becoming an increasingly important factor in winning market share in the long-term savings market.
The group has been highly successful in establishing itself as a leading force in the sale of index tracker funds and is thought to be well-placed to scoop a substantial share in the market for low cost stakeholder pensions.
Mr Wanless is believed to have offered the well-respected David Prosser, the L&G chief executive, a senior role within the bank, granting him full responsibility for NatWest's wealth management operations, which include Coutts, the private bank and Gartmore, the fund management arm. It is expected that the Legal & General brand will be retained.
The two groups had hoped to delay an announcement until the deal was concluded. However, their hands have been forced by the unusually high activity in Legal & General shares yesterday.
These soared 10 per cent with over 41 million shares changing hands, more than three times the normal daily trading volume in the stock.
One analyst said last night: "This is vastly more valuable to NatWest than than Widows is to Lloyds."
Mr Prosser, who is credited with having been the driving force behind the changes at L&G, has been adamant in the past about his conviction that the group would be better off remaining independent.
However, he has received a number of approaches from potential bidders in both the UK and abroad over recent months, including Lloyds TSB, Halifax and Aegon, the Dutch insurer.
These have highlighted the value of the group to a potential bidder. The Widows deal has also been a factor in his change of heart.
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