The increased offer comprises 1.75 new Bank of Scotland shares plus 1.90 pounds in loan notes per NatWest share. This compares with the initial bid of 1.6 shares plus 1.20 pounds in loan note, which on Thursday amounted to 22.5 billion pounds.

The new offer also includes a special dividend of up to 1.20 pounds per NatWest share once Bank of Scotland has sold off NatWest units Ulster Bank, Greenwich NatWest and Gartmore.

Under the new offer, NatWest shareholders would own 75 per cent of the enlarged group, up from 68 per cent in the original offer.

"These terms reflect Bank of Scotland's confidence that it can run NatWest better, improve its performance, and transform its profitability. Our proposals for NatWest will unlock value for both sets of shareholders," said Governor John Shaw.

"I very much hope that (NatWest Chairman) Sir David Rowland and his colleagues will now feel able to recommend our bid," he said in a statement.NatWest later issued a brief response, asking shareholders not to take any action on the raised bid.

But sources close to NatWest said they were "highly sceptical" of the new offer, noting that the special dividend was obtained from assets already owned by NatWest.

Analysts said the Edinburgh-based bank increased its chances of winning NatWest without diluting its own earnings per share and the bid was comfortably earnings enhancing, but a counter bid from Royal Bank of Scotland would be favoured.

"It may not succeed because of the antagonism between Bank of Scotland and Natwest," said Enskilda Securities's Keith Baird. "That creates risks and institutional investors may feel more confortable with a Royal Bank solution which brings many of the cost savings and potentially fewer of the risks."NatWest shares jumped six per cent immediately after the higher bid to 15.65 pounds, but later retreated to stand 60 pence or four per cent up at 15.31 pounds 1040 GMT. Bank of Scotland shares lost five per cent to 727P.

The share and loan note offer values NatWest at about 15.32 pounds per share or 25.58 billion pounds, based on Thursday's closing share prices. That rises to 16.52 pounds per share or 27.58 billion pounds once the special dividend is included.

Bank of Scotland's move follows trade and industry secretary Stephen Byers' decision on Thursday to clear the bid on competition grounds, scotching market fears of a full inquiry.

Bank of Scotland still has until "day 46" of the 60-daytakeover timetable, or until December 4, to raise its bid.

Analysts said Bank of Scotland's early move was clever because it pre-empted a Royal Bank counter-bid and NatWest's final defence, which must be released by Saturday night. Royal Bank must declare its intentions by "day 50" which is December 8. It reports its annual results on December 2.

Royal Bank announced on Friday its chairman Viscount Younger would retire in January 2001. The move is seen clearing the final hurdle for a bid for NatWest because Younger was thought to have cautioned against such a move, particularly a hostile bid. Chief Executive George Matthewson will succeed Younger.

Royal Bank is also awaiting the outcome of an initial competition review of a planned bid, expected by December 6. Analysts and competition lawyers said Byers' decision had increased the chances of a clearance for Royal Bank.

"I think they (Royal Bank) could come in comfortably at 17 pounds, 10 per cent above the current level, and then either they or Bank of Scotland would have to raise it again to win the day," said Charterhouse Securities analyst Simon Willis.

Having spent weeks telling the market that his original offer was "full and fair", Bank of Scotland Chief Executive Peter Burt justified the raised bid by saying it is "fuller and fairer".

He said the bank would consider its position in the event that its increased offer for NatWest is trumped by Royal Bank. "If the Royal Bank, or anyone else, comes with a higher offer, we'll consider our position," he told a conference call.

Burt also said that Bank of Scotland would not change the current equity ratio on offer to NatWest shareholders. Bank of Scotland, which plans to reap 1.015 billion of cost savings from the merger within three years, said the new offer was open for acceptances until December 17.