Mortgage bank Abbey National today rejected an approach by Bank of Ireland as being "not in the best interest of shareholders".

Bank of Ireland yesterday revealed it had approached Abbey with plans to create a London-listed bank with headquarters in Dublin.

In a statement to the London Stock Exchange today Abbey, which employs 1,700 at its northern headquarters in Bradford, said its board had "carefully considered" the approach.

It said the board "unanimously concluded" that the most effective way of restoring shareholder value would be to "achieve the operating and structural changes" it had targeted. "The board of Abbey National has therefore determined that the Bank of Ireland's approach is not in the best interests of shareholders," it said.

A Bank of Ireland spokesman said: "The bank has noted the statement and is very disappointed with the response to our proposals. As we have not engaged in any negotiations the bank is now considering its next step."

Shares in Abbey National rose when the Bank of Ireland admitted it was interested in a merger.

The Irish bank said it had made a "preliminary approach" to Abbey.

The news pushed Abbey's share price up by eight per cent to 535 pence. The Irish bank said the combination proposedwould involve the establishment of a unified corporate structure with a primary listing on the London stock exchange.

Abbey, Britain's sixth largest bank, lost its chief executive, Ian Harley, recently after a series of profit warnings shook its performance.

It is thought the Irish bank could be prepared to increase its offer but analysts say it is unlikely to launch a hostile takeover bid. Abbey's rejection also opens the way for other potential bidders. National Australia Bank, which has been hotly tipped in the past as a bidder for Abbey, is reportedly monitoring developments at the UK bank.

National Australia Bank owns Clydesdale and Yorkshire Banks in the UK.