ABN set to drop Barclays recommendation: sources

LONDON (Reuters) - Dutch bank ABN AMRO AAH.AS is likely to drop its formal recommendation for suitor Barclays' (BARC.L) 65.6 billion euro ($89.6 billion) takeover offer on Monday, sources familiar with the situation said on Sunday.

Barclays' offer, sweetened last Monday, is formally conditional on a recommendation from ABN, but the sources said the British bank was unlikely to pull out of the race as a result of the move, and could instead revise that requirement.

ABN's managing and supervisory boards met on Friday and over the weekend, and an update on the takeover is expected alongside the bank's quarterly earnings, due to be published on Monday.

The Dutch bank's management originally supported Barclays, but the revised bid from the British bank no longer included the ABN boards' recommendation.

The sources said on Sunday that ABN's boards concluded this weekend they could no longer recommend Barclays' mostly share offer over a higher, mostly cash bid from a rival consortium led by Royal Bank of Scotland (RBS.L).

ABN, which has come under pressure from investors to seriously consider both offers, is expected to remain neutral, allowing the matter to be resolved by shareholders.

The RBS-led offer, which would result in a break-up of ABN, is more than 90 percent in cash and adds up to 38.1 euros per ABN share at current market prices -- against Barclays' bid at 34.7 euros per share.

Barclays sweetened its offer with a cash portion, as China Development Bank and Singapore's Temasek took stakes in the bank, but its offer remains mostly in shares, and therefore vulnerable to recent market turbulence.

ABN shares closed at 34.9 euros on Friday.

Should ABN drop its formal recommendation, Barclays is expected to hold out for some improvement in its share price and seek support at a later date, the sources said on Sunday.

In the terms of its revised offer, Barclays said it reserved the right to "extend the date (July 30) for satisfaction of this pre-condition or waive the pre-condition in the event that it is not satisfied".

ABN AMRO, Barclays and RBS declined comment on Sunday.

Separately, Barclays confirmed a report in the Sunday Times newspaper that a group of unnamed hedge funds approached it to ask for help in resisting the RBS-led offer for ABN.

The hedge funds asked Barclays to take a stake in RBS partner Fortis (FOR.BR) (FOR.AS) and then vote against a key rights issue as the Belgian-Dutch bank raises cash for its part of the ABN deal. Barclays said it rejected the funds' offer.

Fortis' shareholder meeting is set for August 6.