NatWest said it had refused to help Tesco expand further into retail banking and insurance, a decision which is the clearest indication so far of the extent of the threat from the supermarket chains to the big English high street banks.
Tesco's large store network could soon be competing head-on with NatWest's branches, but Royal Bank has a far smaller overlap with Tesco.
It has only a 3-4 per cent banking market share in England and Wales.
Shortly afterwards, Lord MacLaurin, chairman of Tesco, resigned as a non-executive director on the NatWest board because of the potential conflict of interest, and David Reid, the deputy chairman of Tesco, quit his non-executive directorship of the insurance group Legal & General. Tesco will sell life insurance through its new joint venture with Royal Bank, which owns the telephone insurance company Direct Line and also has a strategic partnership with Scottish Widows, a competitor of L&G.
Derek Wanless, NatWest chief executive, said Tesco's plans conflicted with NatWest's own retail banking strategy.
It emerged that NatWest may make a claim against Tesco for the cost of pulling out of the five-year contract to manage the pioneering Tesco Clubcard, which pays interest on credit balances and has a low charge to borrowers. The Clubcard sparked the war among supermarkets to enter financial services.
NatWest said the intention had been to work with Tesco over the five years of the contract to develop new card-based products, but "what they came to us with was akin to full retail banking and that did not fit with us".
NatWest added: "We will have to sit down with Tesco to thrash it out. There is a contract and they have given indications today that it will be broken."
Tesco said it offered NatWest the opportunity to continue as its banking partner but the offer was declined. NatWest refused to rule out a claim against Tesco for the cost of winding down the Clubcard service, which employs a separate processing unit and a number of managers at the banking group to service the 9 million Clubcard customers. The problem for NatWest was that Tesco decided to go well beyond plastic card products by developing a wide range of services including a pilot project for an in-store bank later this year. The first big launch will be a Tesco credit card. The joint venture may apply for a banking licence.