National Australia Bank could emerge as one of Britain's biggest retail banks as it reportedly considers a merger with financial investment upstart NBNK to launch a joint bid for the 632 branches put up for sale by Lloyds Banking Group.

London's Daily Telegraph newspaper has reported NAB's UK business is in merger talks with NBNK, the challenger bank which is run by former Northern Rock executives, to provide a bidding vehicle to move on the Lloyds branches.

NBNK, co-founded by Peter Levene, the chairman of Lloyd's of London, is discussing the takeover of NAB-owned Clydesdale Bank and Yorkshire Bank to form a new banking major, the Telegraph said in an unsourced report.

NAB shares fell 58.5 cents, or 2.6 per cent, to $22.18 in early trade, while the benchmark S&P/ASX200 index was down 1.5 per cent.

NBNK was launched last year by Mr Levene and a consortium of high profile London finance executives as a vehicle to acquire UK banking assets. The vehicle has the backing high profile investors including wealth manager Aviva and Invesco.