The merger will create the world's eighth biggest bank

According to the Sunday Telegraph an HBOS decision on a possible bid to challenge Spanish Bank Santander Central Hispano "is on a knife edge".

The HBOS board is will discuss a bid this week and could possibly table an offer on Monday, the Observer added.

Newspaper speculation suggests that an offer from HBOS will be around �10bn - more than Santander's �8.6bn.

However, HBOS refused to comment on the claims.

Speedy deal

"We said some time ago we were in the early stages of considering whether we would or would not bid for Abbey," an HBOS spokesman said.

"That remains the case and there can be no certainty that we will proceed with a bid."

If HBOS does decide to make an offer for Abbey it will have to move quickly.

Abbey is expected to post the Spanish bank's bid document to shareholders next week, while Santander has said it wants to complete the deal a month earlier than planned.

Juan Inciarte, the Santander executive in charge of the Abbey bid, said last weekend that he hoped to wrap up the deal by November rather than the end of the year.

The Sunday Telegraph added that any decision by HBOS would depend on its lawyers' analysis of whether a deal would be blocked by the UK's competition watchdogs.

Three years ago, Lloyds TSB launched a high-profile bid for Abbey, but was blocked on competition grounds.

Buying Abbey is seen as the last major merger opportunity within the UK banking sector, which has undergone a wave of consolidation in the past 10 years.

Jobs fears

Under the terms of Santander's offer any prospective rival bidders have until Abbey's extraordinary general meeting in October to state their intention to table an offer.

Santander is using a scheme of arrangement to bid for the bank, as just 75% of Abbey's shareholders need to agree the deal for Santander to win total control of Abbey.

A normal offer could require 90% approval from shareholders.

Santander has said its takeover would trigger just 3,000 job losses amid the UK bank's 26,000 employees, mainly because it does not intend to close any branches.

However, reports claim that if HBOS wins out many High Street branches would disappear as they are located too close to the 741 sites owned by Abbey.