Interest in buying water firms has increased recently

The bank said it was "reviewing" the water firm, which it bought four years ago, as part of normal procedures, but would not comment further.

Southern Water, which supplies Kent and Sussex and holds assets of some �2.9bn, said it was "business as usual".

Utilities firms have posted strong profits recently, adding to speculation about sales in the sector.

Wider interest

Interest in the water industry - especially by private equity firms - has risen. They are seen as a source of solid cash generation, say analysts.

While RBS owns a 50% stake in Southern Water, in terms of economic interest this figure is around 90%, due to a complex ownership arrangement.

The private equity arm of RBS is reported to have selected Deutsche Bank to advise on options for Southern Water. Deutsche Bank was unavailable for comment.

Increasing interest in the utilities industry was evident last year when Australia's Macquarie bought Thames Water for a 20% premium on the group's value.

Meanwhile Anglian Water was sold to a group of investors in Britain, Australia and Canada, for a 25% premium.

The speculation around Southern Water comes as a series of water firms are set to post profits this week.