Abbey has about 1.8 million shareholders

HBOS had been expected to trump the estimated �8.7bn ($15.6bn) agreed bid for Abbey made by Spain's Santander Central Hispano (SCH).

But HBOS said it had decided it would be better off focusing on its existing business than trying to buy Abbey.

An SCH-Abbey deal would create Europe's fourth-biggest bank. SCH said the deal should be completed on 12 November.

Head triumphs over heart

Any bid from HBOS was expected to have come under close scrutiny from UK competition watchdogs.

Lloyds TSB's bid for Abbey in 2001 was blocked by regulators, and a tie-up between HBOS and Abbey would have created a bank with about 35% of the UK mortgage market.

The heart would have loved to have done it but the head says don't compromise what you are already doing for your shareholders James Crosby, HBOS chief executive See Abbey National's share price See HBOS's share price

HBOS said it was confident it had had a "strong competition case" to put before regulators, and had identified "very substantial" opportunities for potential cost savings.

Nonetheless, HBOS said it had decided it could deliver better value for shareholders through its existing business than by buying Abbey.

"The heart would have loved to have done it but the head says don't compromise what you are already doing for your shareholders," HBOS chief executive James Crosby told Reuters.

"From our point of view, Abbey was a one-off opportunity that we had to crawl over."

One horse race

HBOS's decision appears to have cleared the way for SCH, with analysts saying there is little chance of a rival bid coming forward.

"I'm very pleased that the uncertainty has disappeared," said SCH's chairman Emilio Botin.

"We remain on track and Santander is determined to close the deal."

There was more good news for SCH later on Wednesday when the European Commission cleared its bid for Abbey.

"The deal raises no competition concerns since the two banks presently operate mostly in different countries," the Commission said in a statement.

It added it had taken into account SCH's pledge to amend its alliance with Royal Bank of Scotland (RBS). Last week SCH sold a 2.5% stake in RBS.

SCH said it would be posting details of its offer to Abbey shareholders on Friday.

SCH is planning a secondary listing for its shares in London

A meeting for shareholders to vote on the deal is scheduled for 14 October and SCH said it expected the deal to be completed on 12 November.

It also confirmed that if the takeover goes ahead it would seek to make cost savings of about 450m euros (�300m) which would involve the loss of 3,000 jobs.

Under the terms of SCH's offer, Abbey National shareholders will receive one share in the Spanish bank plus 31 pence in cash for each of their Abbey shares.

The bid had been worth about 590p per Abbey National share, but the stock has been trading above this level in recent weeks in anticipation of a higher bid from HBOS.

Following HBOS's announcement on Wednesday, Abbey National shares fell sharply to close down 37.5 pence, or 6.2%, at 572.5p, while HBOS shares ended up 23.5p, or 3.3%, at 738p.

Santander shares in Madrid were 2.2% lower at 8.07 euros.

Help for shareholders

Many Abbey National shareholders had been hoping that HBOS would enter the race for the bank because they were unhappy at the prospect of owning shares in a Spanish bank.

However, SCH sought to soothe investors' fears on Wednesday by detailing how it would make things easier for Abbey shareholders to hold and deal in its shares.

Shareholders will be able to receive dividends in sterling and SCH is also planning a secondary listing for its shares in London.

SCH will also provide a free share dealing facility for Abbey shareholders who hold less than 2,000 shares.

Abbey currently has about 1.8 million shareholders, many of them private investors with only a few hundred shares which they received when Abbey floated on the stock exchange in 1989.