Industry sources said on Monday the London-based bank was expected to take over either Seoulbank or Korea First Bank, which were due to be sold to foreign investors by end-January, 1999.

The purchase would come as part of Korea's pledge to the International Monetary Fund for last year's $58 billion bail-out.

Officials at HSBC's Korea branch and the South Korean government declined to comment.

The sources said HSBC completed its due diligence examination of the two banks last week.

"It's now top management's decision," said a source who asked not to be identified. "But it's not clear which Korean bank the foreign bank is more interested in." Another source said he expected South Korea and the foreign bank to sign a memorandum of understanding by the year-end.

If the long-awaited deal isrealised, analysts said, it would have a significant effect on the Korean banking system.

"If we have a big foreign name in a local bank, it would lure aggressive investments in the banking sector," said Jun Lee, a banking analyst at LG Securities. "The impact will be almost like an upgrade of credit ratings in the sector."

Analysts said the government's recent offer to sweeten the sale of the two banks had helped to attract potential buyers despite the institutions' fragile capital base.

Kim Chul-jung at Ssangyong Securities said the negative net worth in Korea First Bank was estimated at between 1.7 trillion and 3.45 trillion won ($1.41 billion and $2.86 billion) at the end of June. He put the figure for Seoulbank at between 1.5 and 3.1 trillion won.