DUBAI (Reuters) - Saudi Arabian lender Alawwal Bank (>> Alawwal Bank), 40 percent owned by Royal Bank of Scotland (>> Royal Bank of Scotland Group plc), has picked JPMorgan (>> JPMorgan Chase & Co.) to advise it on a proposed merger with Saudi British Bank (>> Saudi British Bank SJSC) (SABB), sources familiar with the matter told Reuters on Monday.

Senior management of SABB and Alawwal held talks with advisers on Sunday to discuss the principle of the merger and timeframe for its completion, one of the sources said.

SABB has selected another, undisclosed adviser for the transaction, the sources added. Nobody was available to comment at Alawwal, while SABB and JPMorgan declined to comment.

SABB and Alawwal said on April 25 they had agreed to start talks on a merger that could create the kingdom's third biggest bank with assets of nearly $80 billion.

British banks are the biggest shareholders in both lenders. RBS acquired a 40 percent stake in Alawwal when it bought ABN AMRO in 2007. RBS has been trying sell the stake for a number of years as it retreats from international operations.

HSBC Holdings (>> HSBC Holdings plc) owns 40 percent of SABB, which is the kingdom's sixth largest bank by assets.

Although the timeframe for the merger has yet to be agreed, one of the sources said the accounts of the two banks could be consolidated by the end of 2017, but the merger would take longer.

Mergers and acquisitions are relatively rare in Saudi Arabia's banking sector, where 12 local commercial lenders operate.

Reuters reported in March, quoting sources, that French bank Credit Agricole (>> Crédit Agricole) had picked JPMorgan to advise it on a potential sale of its 31 percent stake in Banque Saudi Fransi (>> Banque Saudi Fransi SJSC), valued at nearly $2.4 billion.

(Editing by Andrew Torchia and Mark Potter)

By Tom Arnold and Saeed Azhar