The auction -- codenamed "Project Verde" -- offers a chance to create Britain's seventh-biggest bank in one fell swoop.

The sale includes 4.6 percent of personal current accounts and 5 percent of the mortgage market, contributing about 500 million pounds of pretax profit in 2008 and income of about 1.4 billion.

"NBNK was formed for the purpose of making acquisitions in order to establish a significant UK retail bank and confirms that it has submitted a bid for Verde," NBNK said in a statement.

European regulators ordered Lloyds to sell the branches as payback for having to be bailed out with taxpayers' money during the credit crisis.

Britain ended up with a 40.6 percent stake in Lloyds and 83 percent of Royal Bank of Scotland after rescuing both banks during the credit crisis with taxpayer bailouts, and RBS has also been told to sell off a host of assets.

NBNK faces competition for the Lloyds branches from Sun Capital and Co-Operative Financial Services, although those two have yet to put in formal second-round offers.

A source with knowledge of the matter told Reuters that NBNK would exercise an option to buy fewer mortgages and other loans than were originally on offer, since tough credit market conditions have made it hard for any bidder to borrow on the market to finance the larger portfolio of loans.

Although Sun Capital and Co-Operative Financial Services have not yet submitted second-round bids, Lloyds has not set a deadline which means the two can still put in offers in the weeks to come, a source involved in the process told Reuters this week.

NBNK was set up last year by Peter Levene, chairman of the Lloyd's of London insurance market.