Royal Bank of Scotland Group - Britain's second-largest bank - is set to buy up to 15 per cent of state-backed Bank of China by early next month.

According to one report, the Edinburgh- based lender signed a memorandum of understanding with Bank of China in April and the two sides are negotiating a sale of as much as 15 per cent, which could cost up to $5 billion (£2.87 billion).

A Royal Bank spokeswoman declined to comment. The bank has tried to play down its ambitions in China, saying it was looking at joint ventures and did not plan a big deal.

The bank sold £2.5 billion worth of shares last year to pay for its acquisition of Charter One in the United States and has said it does not plan to raise more cash from shareholders soon.

"We do not believe that any major deal is imminent and certainly not one requiring equity issuance; however, we believe this news is likely to lead to some weakness today," Keefe Bruyette & Woods banking analysts said in a note.

Royal Bank is rebuilding its capital after the Charter One deal, and its main source of acquisition funding could be selling a 2.8 per cent stake in Spanish bank Santander, which is worth about $2 billion (£1.14 billion).

Royal Bank's shares were down 0.4 per cent at 1,707 pence following the report, making them the biggest fallers in a buoyant UK banks sector.

Bank of China officials were not immediately available for comment. Beijing is fully opening the banking sector to foreign competition by the end of 2006.

Last month, Switzerland's UBS said it was considering a $500 million (£287.3 million) stake in Bank of China. The banks have an extended history, as UBS helped Bank of China list its Hong Kong arm.

China has injected $60 billion (£34.4 billion) into Bank of China, China Construction Bank and Industrial & Commercial Bank of China (ICBC) and encouraged them to find strategic investors to improve operating standards and risk controls.

Construction Bank sold a seven per cent stake to Bank of America for $3 billion (£1.72 billion) earlier this year and is pledging to list by the end of this year.

Bank of America paid about 1.15 to 1.2 times book value for its Construction Bank stake, with an agreement to invest another $500 million after the bank goes public.

Bank of China's book value was 205.3 billion yuan (£14.5 billion) at the end of last year, so a deal structured along the lines of Construction Bank's would be $5 billion, the report said.

Temasek, Singapore's state investment agency, is taking five per cent of Construction Bank for $ 1 . 4 billion (£804.5 million).

ICBC, China's largest bank, wants to sign a memorandum of understanding for a ten per cent stake sale by September, with possible investors including Credit Suisse Group and Goldman Sachs.