Abbey has about 1.8 million shareholders

No formal decision has been made, but the Financial Services Authority (FSA) said it saw "no material impediments" to the proposed takeover.

Spain's Banco Santander Central Hispano (SCH) has made an �8.5bn bid for Abbey.

The FSA's comments came on the eve of a meeting of Abbey shareholders who are due to vote on the offer.

'Welcome news'

The City of London's watchdog has three months to make a formal decision about the merger but it would not say when it started examining the deal.

On Wednesday, the FSA intimated that it "may be helpful" in advance of the extraordinary general meeting to note that at this stage it saw no reason to block the takeover.

"This is welcome news on the eve of our EGM," said a spokeswoman for Abbey.

Shareholders at Thursday's meeting at Wembley conference centre, north London, are expected to give the go-ahead to the deal.

The Spanish bank's hopes were boosted last month when rival banking giant HBOS walked away from making an approach.

If the deal is backed by Abbey shareholders on Thursday and Banco Santander investors next week, it is expected to be completed in November.