By Tony Munroe and Steve Slater

The move represents a partial retreat to its home market by RBS, which had been expected to sell the stake after the UK government took a 58 percent holding in the bank, hit hard by the credit crunch and Britain's economic slowdown.

The bank is selling all of its 10.8 billion Bank of China <601988.SS> shares at between HK$1.68 and HK$1.71 apiece, the term sheet showed, or a discount of 7.6-9.2 percent to Bank of China's closing share price of HK$1.85.

Bank of China said it is in talks with RBS about the sale, and an announcement on the deal was subject to communication between the two.

RBS -- which still has other operations in Asia as well as significant U.S. interests such as banking group Citizens -- would be the latest overseas investor to sell a stake in a Chinese bank and would reap a sizable profit on the 4.3 percent holding, which it bought in 2005 for $1.6 billion.

RBS declined to comment.

The sale is being handled by Morgan Stanley .

"It makes sense and it will crystallize a gain. It's not a stake that has strategic importance in terms of synergies for the group," said Ian Gordon, analyst at Exane BNP Paribas in London.

"There's no necessity for holding on to the stake in Bank of China irrespective of their ambitions in the region," he added.

Swiss bank UBS AG last month sold a 1.5 percent stake in Bank of China, and Bank of America last week sold a 2.5 percent stake in China Construction Bank <601939.SS> for just over $2.8 billion. Those stake were sold at a discount of around 12 percent.

The sale will leave Singapore state investment agency Temasek as the largest foreign investor in Bank of China, with a 4.1 percent holding. Temasek is regarded as being under less pressure to sell its stake. It (Temasek) also holds about 2.1 percent of China Construction Bank <0939.HK>.

By 1115 GMT RBS shares were down 8.7 percent at 50.2 pence, one of the weakest stocks in a sharply lower European bank sector. Dealers blamed the fall on a reversal in a fragile mood among UK bank stocks and concern about a loan exposure to bankrupt U.S. chemicals group Lyondell Chemical.

(Additional reporting by Heng Xie in Beijing)