The chief executive of Bank of Scotland, Peter Burt, has reluctantly admitted defeat in the takeover battle for NatWest.

In a memo to staff, Mr Burt said: "You will have heard that we have lost our bid for Natwest. This saddens us, but we are far from downhearted."

Losing the takeover tussle will be a bitter blow to BoS, whose audacious hostile bid galvanised the banking industry into a long overdue process of consolidation.

Confirmation of victory by its arch-rival Royal Bank of Scotland is expected at any time, although NatWest appears to be remaining defiant.

If NatWest refuses to agree a friendly deal, RBS must secure more than 50% of shareholder backing, and this appears all the more likely to happen soon after an announcement by one of NatWest's major shareholders.

Phillips & Drew Fund Management (PDFM) said it would switch its support from Bank of Scotland to RBS if necessary to prevent a hung vote.

Further backing came as Scottish Widows Investment Management pledged to Royal Bank its 1% stake in NatWest and Norwich Union its 1.12%.

PDFM, which holds a 2.3% stake, called on the NatWest board to lay down its defences and accept the RBS offer.

A spokesman said: "The market has clearly decided that NatWest should lose its independence.

"We acknowledge that it appears to be going RBS's way and we would therefore consider switching our support to ensure decisive support and an overall majority."

Larger institutional backers Mercury Asset Management, Schroders and Standard Life - the second, third and fifth-biggest shareholders in NatWest (with 4.65%, 3.3% and 2.66%) - had already said they supported RBS's offer.

RBS has said it expects about 18,000 redundancies from merging operations with NatWest and the finance union, Unifi, says it fears the consequences of so many job cuts.

The union says it will be pressing for guarantees of no compulsory redundancies. Although RBS said it had no plans to close branches, a Unifi spokesman said: "We fear that head office jobs could be cut and branches closed, especially where they overlap."

Much of a muchness

The bids from RBS and BoS are both worth about £23bn and analysts have said there is little to choose between them.

Earlier, it had seemed as if the advantage was firmly with rival bidder Bank of Scotland, when PDFM confirmed it had decided to back its bid.

As the bookmakers shortened their odds on Bank of Scotland, shares in RBS soared on predictions that rival bank Lloyds TSB might attempt to buy it if its bid failed.

But now it is BoS which is looking vulnerable to a takeover bid.

Officially shareholders have until 1300 GMT on Monday, 14 February to decide finally on their choice, but City institutions are now understood to be urging NatWest to throw in the towel so the deal can be wrapped up quickly.

NatWest had repeatedly rejected the increased takeover offers from its two Scottish rivals, saying both bidders are in danger of over-stretching their finances.

Sir David Rowland said: "Neither offer adds real value and both would leave the offeror financially stretched."

NatWest repeated its previous arguments that banking mergers were high-risk and cited cases in the US which had destroyed value rather than generating benefits.

It also questioned the management experience at both Bank of Scotland and RBS, pointing out that neither had executives who had handled a major merger.

RBS offer

Under the Royal Bank's offer, NatWest shareholders would own 62% of the combined group, which would be headed by RBS chairman Viscount Younger.

RBS would sell off Gartmore and US Greenwich NatWest but keep UK Greenwich NatWest and Ulster Bank.

On upping the bid, chief executive George Mathewson said: "We have injected more cash into this offer in a way which does not involve dismembering the NatWest business and does not disadvantage any of the shareholders involved."

The RBS bid includes an 'additional value share' - guaranteeing a £1 dividend by 2003 and estimated to be worth 70p each - which technically cannot be included in the offer price.

RBS's biggest shareholder, Spanish bank BSCH, is contributing additional cash of up to £500m to back the bid.