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New banking venture NBNK has held talks with Middle Eastern sovereign wealth funds to bolster its bid for 632 Lloyds branches that are up for sale, a source with knowledge of the talks told Reuters on Sunday.

"NBNK has held talks with a number of potential investors including sovereign wealth funds," the source said.

The sale, code named Project Verde, is likely to fetch up to 1.5 billion pounds ($2.4 billion) and will create Britain's seventh-biggest bank.

Lloyds, which is 40 percent owned by the government, said on Friday it was prepared to hold talks with NBNK after an exclusivity period with Co-Op ended.

Lloyds said it would talk to NBNK if it was satisfied the start-up would get regulatory clearance for a deal. That will depend largely on the perception of its capital strength.

The Sunday Telegraph reported that NBNK had held discussions with Qatar Holdings and Abu Dhabi's Mubadala fund.

The backing of either or both funds, which have major investments in businesses including EMI and Harrods, would give NBNK's proposals greater credibility and provide a major boost to its attempt to win approval from Lloyds' board.

NBNK declined to comment.

The venture was set up in 2010 by former Lloyd's of London insurance head Peter Levene, aiming to bring competition to a market dominated by four lenders. It is run by former Barclays and Northern Rock executive Gary Hoffman.

Co-Op's attempt to buy the branches has struggled to get past the regulator due to concerns about its capital position, management experience and the structure of the food-to-funerals conglomerate.

Lloyds has said it could spin off and float the business if it failed to find a suitable buyer.

Many bankers and analysts see that as the most likely option, uncertain that NBNK would have a much better chance of getting past regulators than the Co-op.