Royal Bank of Scotland will decide within the next eight weeks whether to press ahead with a £7 billion sale of its insurance unit amid mounting speculation that it is no longer interested in offloading the operator of Churchill and Direct Line.

Britain's second-largest banking group, which is more than half-owned by the taxpayer, has already rejected an offer for its insurance businesses from CVC Capital Partners, the private equity group.

The bank, which put the division under review in April, remains in talks with CVC and with one other party, thought to be BC Partners, another buyout group.

It is understood that the bank is unimpressed by the terms on the table. It will continue discussions with CVC and BC Partners, but will recommend a deal only if it is in the clear interests of shareholders.

RBS will go public with a decision on whether it plans to keep its insurance operations by the end of February, when it reports annual results.

Stephen Hester, the new chief executive, is keen to retain Churchill and Direct Line, which contribute the lion's share of divisional pre-tax profits of about £1 billion a year.

Mr Hester took charge at RBS in November in the wake of a £20 billion cash call that was underwritten by the Government. The former boss of British Land replaced Sir Fred Goodwin, who was forced to step down after nearly a decade at the helm as a consequence of the shock capital-raising.

Although Mr Hester wants to repay the Government, which owns £5 billion of preference shares and £15 billion of ordinary stock, as soon as possible, sources said that a sale of the insurance business would liberate only up to £3 billion in cash.

“These are hugely profitable businesses. RBS no longer needs to sell them,” said one banking source familiar with the Edinburgh-based group's plans.

The increased likelihood that RBS will scrap the insurance sale underscores the feeling that Mr Hester sees Britain as a central plank in the group's operations. He has signalled that he is more likely to proceed with sales of international businesses than domestic ones.

UK insurance is the only part of RBS's sprawling empire that is on the block, although speculation is mounting that its 4.3 per cent stake in Bank of China, worth more than £1.5 billion, could be sold.

Mr Hester has begun a review of all of RBS's businesses, which is expected to be completed by the end of the first quarter. He has also identified a handful of preferred candidates to replace Sir Tom McKillop, the chairman, whose departure was also a condition of the state's financial support. It has emerged that Mervyn Davies, the chairman of Standard Chartered, and Sir Keith Whitson, the former chief executive of HSBC, have been approached to take on the RBS chairmanship. Several headhunters are working on finding a replacement. Mr Hester wants to ensure that a new chairman is recruited by the end of the first quarter. Sir Tom leaves RBS at the end of April.

Although the Government's support takes some of the heat off RBS, there remains increasing concern that the bank will unveil a profit warning early in the new year.

Analysts at UBS have pencilled in record losses of up to £28 billion as the recession takes its toll of the bank's exposure to bad debt and as the sliding housing market hits mortgage lending.

Banking analysts are beginning to speculate that high street banks will need to ask for fresh capital injections during the first half of next year.

RBS declined to comment on the insurance sale or the chairmanship.

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