Santander, Spain's largest bank, was last night locked in talks to buy UK-based Abbey National in a deal that could be worth potentially £8.85 billion (€13.4 billion) and create the world's eighth-largest bank by assets.

Shares in Abbey soared by 87p to 580p, valuing the bank at £8.56 billion after Santander confirmed the talks.

Spanish banking sources said talks between the two banks were "very advanced", and a deal could be agreed as early as next week.

Santander has called a board meeting tomorrow to discuss an offer for Abbey. If Abbey accepts the offer, it would be the biggest acquisition ever attempted by the Spanish bank.

The UK bank lost £686 million in 2003, blaming its wide-ranging restructuring programme.

Santander, which has a market capitalisation of €38.4 billion, would be absorbing a bank that is three-quarters of its size in terms of assets.

Abbey has been a potential bid target for four years, but UK banks have been prevented from bidding after the Competition Commission blocked an £18 billion bid from Lloyds TSB in 2001.

Banking sources said Santander had already tabled an offer in the vicinity of 600p a share - a premium of about 20 per cent on Abbey's share price before news of the talks leaked out.

Last night there was speculation that this could flush out other potential bidders, including US banks. Bank of Ireland made a bid for Abbey in 2002, but this was rejected by the UK bank's board.

Last night, Bank of Ireland said it would not comment, but it is reliably understood that it is not examining becoming involved this time.

Abbey has been struggling to turn around its core UK business since UBS executive Mr Luqman Arnold took over as chief executive in 2002. - (Financial Times Service)