Sovereign Bank and M&T Bank Corp. were in advanced merger discussions in recent weeks but the talks are dead for now, people familiar with the matter said Tuesday.

The deal would have catapulted Sovereign's owner — Spain's Banco Santander SA — into the upper-ranks of U.S. banking, at a time when many European banks are seen as too weak to make big acquisitions.

Even with troubles in the euro-zone economies, Santander is eager to push into the U.S. market, using Sovereign as a base for expansion.

M&T has remained independent amid vast consolidation of the regional-banking market. The bank has a market capitalization of $10.4 billion.

A 22.5% stake in the bank has recently been put into play, after M&T's largest shareholder — Allied Irish Banks PLC — announced plans to divest the holdings to shore up its own flagging capital base.

The plan under discussion involved M&T buying Sovereign from Santander, said one person familiar with the discussions. Santander would then get a stake in the newly merged M&T, this person said.

The next step involved Santander purchasing the AIB stake, this person said.

Talks were active in recent weeks, but have since fallen apart. M&T grew skeptical of the combination, said people familiar with the matter. They added that the talks aren't ongoing, for now. One potential outcome is that the AIB stake could be sold on the open market,

Despite the housing downturn in Spain, Santander has been seen as a strong survivor of Europe's leading banks. The recent deal talks show it still has has robust intentions for the U.S. market.

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