Bank of Scotland couched the unexpected offer as an alternative to NatWest's proposed 10.7 billion pound acquisition of insurance group Legal & General Plc. It is conditional on the Legal & General deal not proceeding.

NatWest had no immediate response to the offer, announced to the London Stock Exchange shortly before the start of trading. NatWest shares, which have sagged after the Legal & General deal, jumped 25 per cent to 13.19 pounds in early business, while Bank of Scotland added 11.5p (pence) to 718P. Legal & General slid more than eight per cent to 176p.

Under the Bank of Scotland proposal, NatWest shareholders would end up holding approximately 68 percent of the total issued Bank of Scotland shares. NatWest, Britain's fourth largest bank, has a marketcapitalisation of 17.7 billion pounds, more than twice as big as Bank of Scotland's 8.9 billion, based on Thursday's close.

Bank of Scotland said it believed the companies should focus on core banking rather than branching out into the insurance sector and saw scope for cost savings and improved efficiency through its proven management practices. "NatWest, through its recent offer for Legal & General, appears to be pursuing the bank assurance model, untested in the UK," said Bank of Scotland Governor John Shaw.

"We continue to believe more value could be created for shareholders through a concerted effort to eliminate costs within the NatWest banking business," he added.

Bank of Scotland, which reports interim results next week, urged NatWest shareholders to vote against the Legal & General deal at the extraordinary general meeting on October 6, to allow its own deal to proceed.

Bank of Scotland said its offer would be on the basis of 1.6 New Bank of Scotland shares and 1.20 pounds nominal amounts ofLoan Notes for each NatWest share. The offer values each NatWest share at approximately 1250 pence, a premium of some 20 per cent over Thursday's close. Bank of Scotland said it had discussed a merger with NatWest last year but these talks had failed to produce agreement.

It said it would retain NatWest as a separately authorised bank, retaining the name and goodwill attached to the brand. However, it said it said it would make its Chief Operating Officer, Gavin Masterton, Chief executive of NatWest.

Bank of Scotland said the deal would be earnings accretive in the first year even before cost savings are taken into account. It said NatWest businesses not core to the enlarged group would be sold and said these would include fund manager Gartmore, Ulster Bank and investment banking arm Greenwich NatWest.