By Colin Barr
June 17, 2010

Are Spanish eyes smiling on a big bank in Buffalo?

There is renewed talk about a deal between Spain’s Santander

and M&T

, the U.S.-based lender that has been thrust into the spotlight by its biggest shareholder’s need to raise new funds.

The latest chatter sent M&T up 11% to within a dollar of its 52-week high, even though an outright takeover isn’t likely in the cards.

Allied Irish Banks

has owned almost a quarter of M&T for seven years, but the Irish bank was told in March to raise capital to absorb losses from the Irish property bust. The bank concluded it would have to sell its holdings in M&T, which is the 28th biggest U.S. bank holding company, according to federal data. The stake is worth more than $2.5 billion at current prices.

The terms of M&T’s agreement with Allied Irish gives the Buffalo-based bank a large degree of control over the sale process, which has prompted some observers to speculate the stake would eventually be sold off piecemeal. M&T said its policy is not to comment on rumors and speculation.

But it seems Santander, which already owns Philadelphia thrift Sovereign, has been persistent. M&T and Sovereign discussed a merger last month before discussions collapsed over the issue of control.

Santander has said it wants to expand in the Northeast, where it and M&T each have around 750 branches. But M&T wants to remain independent and was pushing for a deal in which it would take over Sovereign while Santander took a big stake in M&T.

The latest round of chatter comes at a time when Spanish banks are under pressure, but Santander – by far the biggest of the group – is still bent on expanding. The bank this month agreed to pay $2.5 billion to buy out Bank of America

, its partner in a Mexican banking joint venture. It posted the highest score on European stress tests, a Spanish paper reported.

Even so, an outright purchase of M&T seems not in the cards. M&T’s current market capitalization is almost $11 billion, and ongoing questions about Santander’s own balance sheet mean coming up with that sort of cash would be a stretch.

Though Santander is well capitalized and appears more robust than most of its peers, all the European banks – especially those in deficit-financed regions such as Spain — are under pressure because of the questions about national government balance sheets.

And the most recent comments from Santander officials are decidedly lukewarm. After earlier saying there had been talks, vice chairman Matias Rodriguez Inciarte said this to Dow Jones:

“The only thing that’s been said is that there were talks about a possible deal with a bank called M&T…and nothing else. At the moment, there isn’t anything else to add to this.”

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