Shawmut National Corp. is negotiating to buy Boston-based UST Corp., sources said Tuesday.

By acquiring UST, Shawmut would add $2.3 billion in assets in its principal markets of Massachusetts and Connecticut.

Debt Issue Postponed

Officials of the two companies declined to comment. Shawmut hinted at a potential acquisition in announcing Tuesday that it was postponing the completion of a $150 million debt issue.

Hartford-based Shawmut, which has $22.6 billion in assets, said only that it was pursuing "a potential in-market" acquisition.

Speculation had centered on Northeast Bancorp. of Stamford, Conn., with $3 billion in assets, as a potential target of Shawmut. Northeast officials declined to comment.

Shawmut's stock was trading Tuesday afternoon at $18.50, up 12.5 cents a share. UST's stock price was down 62.5 cents, to $8.625, which would make its market value about $123 million.

Northeast's shares were up 25 cents, to $6.75.

Mediocre Earnings

UST has been struggling with lackluster earnings and high levels of nonperforming assets, but analysts believe it has put the worst of its problems behind it.

Analysts also say that like other New England banks its size, UST is too small to compete in a slow-growth economy.

A successful deal between Shawmut and UST would have significant strategic and symbolic significance.

Demonstration of Strength

It would make Shawmut the dominant middle-market lender in the Boston area. It also would demonstrate to investors that it was well on the road to recovery.

Regulators tend not to let banks negotiate mergers unless they are confident about their turnarounds. and sources have said that until recently that prohibition applied to Shawmut.

UST earned $1.4 million in the first nine months this year, compared with a loss of $3.4 million in the 1991 period. Nonperforming assets fell $8.7 million over 12 months to $159 million on Sept. 30. The leverage capital ratio was 6.27%.

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