SHARES in part-nationalised Royal Bank of Scotland dropped more than 1% as investors reacted to the collapse of a deal to sell a portfolio of 316 branches to Santander.

Despite signs that potential buyers such as Sir Richard Branson's Virgin Money and US private equity house JC Flowers are looking again at the business, most in the City predict that RBS will be forced into a less lucrative deal.

Edinburgh-based RBS had agreed in 2010 to sell the business to the Spanish institution for £1.65 billion.

The disposal of the business, which includes six NatWest branches in Scotland, was ordered by the European Commission as one of the conditions of RBS receiving a £45bn bailout at the height of the financial crisis.

But now RBS faces both taking a lower price and asking the Treasury to appeal on its behalf for leniency on the 2013 deadline originally agreed.

Shailesh Raikundlia, analyst at Espirito Santo, said: "RBS now has only 13 months to find another buyer or float the business. Either way, we expect the revised price to be significantly lower."

RBS sought to reassure affected customers that there would be no disruption to their service.

But Pete Hahn, lecturer at Cass Business School, said: "Like that old (Neil) Sedaka song, RBS is finding out that 'breakin' up is hard to do'.

"While RBS continues to offer assurances of certainty to its customer base, many are probably wondering whether it is time to find their own new bank before RBS does."

RBS's shares closed down 2.8p or 1% at 268.1p.

RBS was expected to see some reduction in the sale price of the portfolio due to the weakening economy, before the deal with Santander was completed.

But now it is thought that RBS might receive as little as £700 million for the business, which has 1.8 million customers and accounted for £186m of operating profit in the first half of 2012.

Bank valuations have been affected by the UK's retreat back into recession and the eurozone crisis.

Among those thought to be interested in the business are Virgin Money, which bought Northern Rock last year and had been interested in the RBS portfolio before Santander won out.

US private equity firm JC Flowers is also understood to be interested.

Another option, although it would likely net RBS less than a straightforward sale, is to float the business.

To do so, it could dust down the Williams & Glyn's brand, a business that was strong in the north-west of England but disappeared as a name almost 25 years ago.

This is a more likely option than it might have been previously after RBS successfully sold a 30% stake in its Direct Line insurance business via flotation last week in another EU-mandated sale.

The bank is also expected to seek an extension to the deadline for a sale to take place before the end of next year.

But this is likely to occur only once RBS has another buyer lined up.

Meanwhile, it has emerged that RBS has suspended senior rates trader Jezri Mohideen, head of rates trading for Europe and the Asia-Pacific region, as part of an internal investigation into the setting of the London Interbank Offered Rate and other interest rates.

RBS said: "Our investigations into submissions, communications and procedures relating to the setting of Libor and other interest rates are ongoing. RBS and its employees con- tinue to co-operate fully with regulators."

In June, Barclays was fined £290m by US and UK regulators for manipulating Libor.