TD, which has been an aggressive buyer of US retail banking assets over the past decade, held discussions with RBS about buying all or part of Citizens, according to a report last year in the New York Post newspaper.

That put pressure on TD's stock as investors worried about the risk of taking on a large US asset with uncertain growth prospects.

Sources close to the matter told Reuters that RBS may signal this week that it may launch an initial public offering of 20 to 25 percent of Citizens.

"It doesn't eliminate the possibility of a (TD) transaction, but it does seem to at the very least delay the possibility for a while," said Robert Sedran, an analyst at CIBC World Markets.

TD's shares rose as much as 2.2 percent on the Toronto Stock Exchange, hitting their highest level since April 2011.

Just after midday, the stock was up C$1.06 at C$85.37.

TD, which will report first-quarter results on Thursday, is Canada's No. 2 bank by market capitalization, and it is one of the larger US retail banks with around 1,300 branches spread along the Eastern Seaboard.

Citizens and its subsidiaries operate more than 1,500 branches across 12 states, and has been estimated to be worth as much as $15 billion.

While TD likes to say its focus is on smaller "bolt-on" deals such as its recently announced $668 million purchase of asset manager Epoch Investments, TD Chief Executive Ed Clark said in December that the bank wouldn't rule out a larger deal if the right one came along.

"We are seeing improvements in the US economy that make larger deals more feasible," he said at the time.

A TD spokesman would not comment on Monday on the RBS reports.