UPDATE 3-RBS confirms Santander bids for 318 branches

* RBS branches expected to fetch 1.5-1.8 bln stg - sources

* Santander says unable to predict when sale will complete

* Deal would add 1.8 million new UK retail customers

* RBS shares up 0.6 pct, Santander up 3.5 pct

(Recasts with RBS statement, adds details, updates shares)

By Sonya Dowsett and Myles Neligan

MADRID/LONDON June 18 (Reuters) - Royal Bank of Scotland (RBS.L) confirmed it had received a bid for hundreds of UK branches from Spain's Santander (SAN.MC), which sources said could yield up to 1.8 billion pounds ($2.7 billion) for the troubled British lender.

Santander, the euro zone's biggest lender, has offered between 1.5 billion pounds ($2.2 billion) and 1.7 billion for the 318 branches, one source familiar with the matter said, while a second source said it had bid 1.8 billion as it pushes ahead with an ambitious global expansion.

"RBS confirms that Santander has submitted a bid which we are seriously reviewing," the British bank said in a statement on Friday. "This remains a competitive process and we will continue to do what is right for our shareholders and customers in disposing of these assets."

Santander is the only one of six suitors to get through to the formal bidding stage of the auction, Reuters reported on Tuesday. [ID:nLDE65E205]

The UK move would be the latest part of Santander's multi-billion euro global expansion, which has already this month involved a $2.5 billion acquisition in Mexico, and which is underpinned by the bank's strong finances as many rivals still reel from the credit crunch.

Buying the UK branches, which RBS was forced to put up for sale by regulators, would boost Santander's British branch network by a quarter, giving it a 12 percent market share.

Shares in Santander closed 3.5 percent higher at 9.35 euros, while RBS was up 0.6 percent at 47 pence.

Under the deal, Santander would inherit 1.8 million new British retail customers as well as 230,000 small business accounts and 1,200 larger corporate customers.

RBS, 83 percent government-owned after it was bailed out in the financial crisis, was last year ordered to sell the branches by 2013 as a condition of winning European Union clearance for its state support.

GOOD FIT

The premises, clustered in northwest and southeast England, are being sold under the Williams and Glyn's brand, reviving an RBS subsidiary that was rebadged in the 1980s.

Confirmation of Santander's interest came after the bank's deputy chairman Matias Rodriguez Inciarte told a conference on Thursday the RBS branches would fit its existing UK business "like a glove."

Inciarte also confirmed reports Santander had held talks about merging its U.S. operations with M&T Bank Corp (MTB.N). [ID:nLDE65G0W0]

Santander has long been seen as frontrunner to win the RBS auction as the cost savings from integrating the RBS branches into its existing UK operation could enable it to pay more than rival bidders.

The RBS branches initially attracted interest from five other suitors, including National Australia Bank (NAB.AX), Spain's BBVA (BBVA.MC) and Virgin Money, part of Sir Richard Branson's Virgin Group [VA.UL].

Santander has had a strong British presence since 2004 when it bought Abbey and it has since also snapped up Alliance & Leicester and the branch network of Bradford & Bingley.

Santander's move comes as the European Union carries out financial health checks on its biggest banks to help reassure investors it can contain the euro zone debt crisis. A Spanish government source said on Thursday the lender had got the best ranking so far in European bank stress tests. [ID:nLDE65G1M6]

In recent years Santander has diversified out of its home base into the United States and Latin America as well as Britain.

The bank said last week 2010 earnings should be similar to 2009's strong result as it unveiled a $2.5 billion buy-up of Bank of America's 24.9 percent stake in Santander Mexico. [ID:nLDE65A0XO]

Santander did not disclose the size of its bid for the RBS branches and said it did not know when the sale process would conclude. (Editing by David Holmes) ($1=.6743 pounds)