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 muchhope 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 comfortable 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 15.65pounds, 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-day takeover 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.