The prospects that RBS will enter the £20.8bn takeover battle increased after it said it was filing a merger notice with the UK's Office of Fair Trading - a preliminary stage to making a full bid.

The Bank of Scotland surprised the City with its bid

Since its arch-rival, the Bank of Scotland, launched the audacious bid for one the UK's largest clearing banks, the RBS has been biding its time.

It said that it was "watching the situation as it develops" but had not made a decision yet as to whether to launch a full bid.

But analysts said that the move made it more likely that there would be a rival bid.

"We see a 70% to 80% chance of Royal Bank bidding," said Mike Trippett of Schroeders.

Lining up support

The RBS appears to be lining up support from other banks in Europe before launching a full bid.

Newspaper reports suggest that it is talking to the Spanish bank BSCH, which already owns a 10% stake in RBS, about launching a joint bid.

Other reports suggest that the Italian bank Sao Paolo-IMI, which has a cross-holding with BSCH, might also be interested in coming into the deal.

Under the plan, BSCH might take a share of up to 29.9% in NatWest.

Some reports says with European support the RBS would be prepared to offer up to £15-£16 per share for NatWest, topping the Bank of Scotland's £12.70 offer and valuing NatWest at £26bn. Others say that the bidding war could push the value of NatWest as high as £33bn.

NatWest shares, already trading £14.42, are likely to be further boosted by the news.

Deadlines loom

The Bank of Scotland may be forced to increase its bid because of the speculation.

It has only received acceptances for 3.25% of NatWest shares for its current offer.

Analysts believe it may be able to increase its offer to as much as £17.60 for the company's shares.

But it has the difficulty of having to make its move without knowing what its rival plans to do. It has until December 13 to complete its bid.

Meanwhile, the RBS has been given until December 3 to say whether it will bid for NatWest.