RBS chief executive Stephen Hester said the collapse was “disappointing” and that a new buyer would be sought. The disposal was ordered by the European Commission in return for UK government's £45bn rescue of the bank.

RBS had been working on the sale for more than two years. The UK bank struck a preliminary deal with Santander to sell the branches and the business of 1.8 million customers in August 2010. However, completion has been delayed several times.

In a statement released last week, Mr Hester said: “It is of course disappointing that Santander decided to pull out of this transaction, especially for the customers and staff involved. RBS will commence a new process of disposal and will provide a further update on this in due course.”

The assets being sold included the RBS branch business in England and Wales, and the NatWest branch business in Scotland, plus some small business and other corporate lending interests. Stephen Hester said the collapse was “disappointing”.

Mr Hester said much of the “heavy lifting” work on the disposal had been done, including separating out customer data and putting in place a separate management. This meant that the assets were “largely ready to be taken on by a new owner,” he said.

One problem for Santander is thought to have been trying to integrate the banks' computer systems, an issue that has dogged other mergers and acquisitions in the financial sector.

There were also suggestions earlier this year that Santander was trying to negotiate a lower price for the acquisition, which was initially thought to be worth £1.6bn. The EU required RBS to complete the sale by 2014.

Santander had hoped the acquisition would boost substantially the size of its small business lending operation in the UK, which the Spanish bank sees as a key area for growth.

Santander said it had pulled out of the deal after it became apparent that a revised deadline for completion would not be met.

The bank said in a statement: “It is now apparent that this revised target will not be achieved. Santander UK confirms that it has therefore notified RBS that it does not believe the conditions to the transfer of the business from RBS to Santander UK will be satisfied by the agreed final deadline of February 2013 and that it is not willing to agree a further extension to that deadline.

”In that case, the agreement will automatically terminate in accordance with its terms and the transfer of the business to Santander UK will not take place.“

Santander UK chief executive Ana Botin added: ”Our guiding principle throughout this transaction has been a seamless journey for customers, which requires the business to be delivered to Santander UK by RBS in a steady state.

”We have concluded that given delays it is not possible to complete this within a reasonable timeframe”.

MercoPress