Santander makes offer for RBS's Williams & Glyn arm - sources

LONDON (Reuters) - Banco Santander has made an offer to take over Royal Bank of Scotland's Williams & Glyn business, two sources familiar with the matter told Reuters on Tuesday, as part of a long-standing plan to grow its market share in Britain.

The move by Spain's largest bank could end a costly seven-year process by RBS to offload the small business lender, a key European Union condition of its taxpayer-funded rescue at the peak of the global financial crisis.

RBS has blamed the complexities of creating a standalone technology platform for the delays in selling Williams & Glyn, seen by some analysts as a major milestone in the lender's road to recovery, return to full private ownership and restoration of dividends.Some 6,000 RBS employees have been working on the project to spin-off the 300 branches, equivalent to 1 in 10 of its UK staff. The process has been described by Chief Executive Ross McEwan as the most complex restructuring in global banking.

RBS, which reports results for the first half of its financial year on Friday, declined to comment.

In a statement, Santander UK, the British arm of the Spanish bank, said it did not comment on market rumours or speculation.

It also said it continued to focus on organic growth but could look at opportunities that benefited its customers and shareholders.

UK GROWTH PLANSantander, which already controls former UK building societies Abbey and Alliance & Leicester, is keen to expand in Britain to offset weakness in its domestic market, where high rates of unemployment and weak economic prospects have led to a rise in bad loans and volatile credit demand.Santander is working on a deal where the unit's loans, deposits, customers and branches would transfer, while some services would continue to be hosted by RBS, one source said. A fully agreed deal is unlikely in the coming days, the source said.

Spanish rival Banco Sabadell acquired TSB from Lloyds Banking Group in a 1.7 billion pound deal in March last year, in a similar effort to diversify revenues.Santander walked away from a deal to buy Williams & Glyn fours years ago amid concerns about its technology platform, three sources with direct knowledge of the matter said.

Industry sources and analysts said two other potential suitors included Virgin Money, and Spain's BBVA.

Williams & Glyn has 1.8 million customers, net loans and advances of 20 billion pounds and customer deposits of 24 billion pounds, making it one of Britain's largest prospective 'challenger' bank brands with potential to poach market share in the small business lending sector from Lloyds and RBS.

The story of Santander's bid was earlier reported by Sky News.

(Reporting By Andrew MacAskill, editing by Sinead Cruise and Alexandra Hudson)