Royal Bank of Scotland said Spain's Santander has pulled out of its 1.65-billion-pound ($2.65 billion) deal to buy 316 UK RBS branches in a big blow to the state-backed British bank.

RBS said it will restart the sale process, which had been ordered by European authorities as a cost for Britain's rescue of RBS back in 2008.

Santander UK had agreed to buy the branches and the business of 1.8 million customers in August 2010. But completion of the deal had been put back several times as the two banks have struggled with technology and separation issues.

(Reporting by Steve Slater; Editing by Gerald E. McCormick)