The Spanish bank, which owns Abbey, held "advanced'' talks with Alliance & Leicester last month, the Financial Times reported, and discussions could continue.
Despite the fact that Alliance & Leicester has been the worst performing UK bank stock over the past six months, in London trading this morning stock rose by 16 per cent, making the bank worth $6.2 billion.
After rumours that Alliance & Leicester would need bailing out of the sub-prime crisis, stock dropped 41 per cent in only six months, but in November the bank said it had funding for the third quarter.
The Spanish bank had takeover talks with the UK mortgage lender, but Santander did not offer an attractive enough deal in mid-December.
But the Financial Times stresses the seriousness of negotiations and bankers were reporting to Emilio Botin, Santander's chairman, hourly on how they were progressing.
"It makes strategic sense for Santander, who are probably keener buyers than Alliance & Leicester are sellers,'' said Simon Maughan, an analyst at MF Global Securities Ltd.
Santander, which is Spain's biggest bank, bought Abbey in 2004 and in the third quarter announced a 22 per cent rise in pre-tax profits at the UK lender.