The two sides have agreed to cancel the agreement that would have seen RBS pay £630m.

The move paves the way for the Halifax, which also wanted to buy the society in March, to go ahead with its higher bid of £780m.

Midshires' members can expect to collect average windfall payouts of £780 if a deal with the Halifax goes ahead, compared with £630 under the terms of the RBS offer.

There has been speculation that other bidders may also step in, offering the possibility of even larger payouts.

David Raye, banking analyst at HSBC Securities, said further offers were likely. "There is an air of consolidation around. It is tough to grow organically and if Birmingham Midshires was more open to offers, banks would be duty bound to consider it."

Midshires pays to get out

The agreement ends weeks of legal wrangles between Midshires and RBS as they tried to negotiate a way out of the deal which was first signed last August.

As compensation for losing out, RBS is to collect a £5m payout to cover its costs.

Midshires has also promised to pay a further £10m should it be sold to Halifax before January, 2000.

RBS bid trumped

RBS last year offered £630m which the society accepted under an exclusivity agreement, barring it from accepting offers from other potential buyers.

But Halifax trumped the RBS bid by offering £780m in March.

Birmingham Midshires first approached RBS in its attempts to free itself from the locking-in clause on April 7 with an offer of £5m compensation.

But a source close to the talks said RBS chief executive George Matthewson had insisted on the Halifax settlement clause.