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The bailed-out bank, which is 82% owned by British taxpayers, was required by the European Commission in 2009 to sell the branches as a condition for receiving state aid. Santander agreed to the purchase in August 2010.
RBS said Friday that it had been notified by Santander that it would be pulling out of the deal to buy 316 branches and the NatWest branch business in Scotland -- a move chief executive Stephen Hester called disappointing.
The bank said in a statement it would continue to work on fulfilling its obligations to the European Commission and pledged the decision would not impact service to customers.