Struggling British lender Lloyds Banking Group is in talks to dispose of its operations in the UAE, with Abu Dhabi Commercial Bank emerging as the frontrunner to pick up the business, sources told Reuters on Monday.

The bank, which is 40 per cent owned by the UK government, has appointed Rothschild as an adviser for the sale, two sources confirmed to Reuters on condition of anonymity.

ADCB, the third largest bank in Abu Dhabi by market capitalisation, now appears the most likely acquirer of the business as the bank looks to expand its retail banking operations in the Gulf country.

'A couple of meetings have taken place, the top management team is active on this and in all probability they (ADCB) are going in for this deal,' a source familiar with the matter said.

Lloyds, which covers the Gulf region from its one branch in Dubai, had total assets of Dh6.1 billion ($1.66 billion) in 2010 compared with Dh6.9 billion in 2009, according to the company's financial statement.

Both Lloyds and ADCB were not immediately available for comment.

A number of European banks have been offloading assets in the Gulf region as they look to raise capital and exit from low-profit, non-core areas in the current difficult banking environment.

Much of this has focussed on selling debt portfolios but there has also been a reallocation of resources away from the region, with a number of banks closing units and bringing operations back to the West.

Retail operations in the Gulf are likely to be one area on the block, as increased pressure from local outfits investing heavily on their offerings combines with a focus on cutting back low-profit units.

'With all the investment which local banks are putting in, it's increasingly difficult for small and medium-sized internationals to compete in the retail space,' said a banker with knowledge of the matter.

'With internationals evaluating their businesses after what happened in Europe, any product line which isn't profitable will go,' he added.

ADCB, one of the most exposed banks to debt-laden Dubai World, sold its 25 percent stake in Malaysian lender RHB Capital  last year to be more focused in the UAE.

ADCB was the buyer of another debt-laden British bank's UAE retail operations, snapping up Royal Bank of Scotland's  business in June 2010 for $100 million.-Reuters