UPDATE 1-RBS draws up rescue plan for Ulster Bank -report
* Could link up with Permanent TSB, Danske, KBC -report
* Irish finance minister wants challenger to main banks
LONDON, March 2 (Reuters) - Part-nationalised Royal Bank of Scotland is working on a plan to salvage its troubled Irish business, Ulster Bank, by merging it with a number of rivals, the Sunday Times newspaper reported.
Attempts to find a buyer for the business have failed and a team inside RBS is looking at tie-ups between Ulster and other lenders, such as Permanent TSB or the Irish units of Danske Bank or KBC, the newspaper reported.
Bolting the institutions together could allow the new Ulster Bank to strip out costs and mount a credible challenge to Ireland's top players.
Ireland's finance minister Michael Noonan said on Saturday he would like a "significant" new bank with a big balance sheet to enter its lending market this year to drive competition in the diminished sector.
Noonan said on Sunday that he was looking at the possibility of overseas banks partnering with Irish lenders to create a competitor to the country's biggest lenders - Allied Irish Bank and Bank of Ireland.
"I'm sending a signal out to the European banking system that a growing economy in Ireland has space for more banking activity and we would welcome their participation in Ireland by way of subsidiaries or by way of going into partnership with some of our domestic banks," he told national broadcaster RTE.
Ulster Bank has racked up losses of 2.5 billion pounds ($4.2 billion) over the past two years. It accounts for less than 4 percent of RBS's assets but was responsible for 20 percent of its bad debt charges last year. Ulster is the biggest bank in Northern Ireland and the third biggest in the Republic of Ireland.
RBS Chief Executive Ross McEwan said on Friday that he wanted to develop Ulster as a challenger to Ireland's biggest two lenders. McEwan was speaking after RBS reported a 2013 loss of 8.2 billion pounds.
The Sunday Times said RBS is in talks with a handful of private equity firms about providing tens of millions of pounds in backing for the venture.
RBS declined to comment.