Representatives of the RBoS Shareholder Action Group had written to their members last week to say they would accept RBS's revised out-of-court offer in a decision supported by its legal advisers, Signature Litigation.

But Scottish businessman Neil Mitchell, a former RBS customer, investor and critic, said on Monday that a faction within the shareholder group had raised the necessary cash to push the case to trial regardless.

In the latest twist, two sources told Reuters that the group's lawyers had now advised rebel shareholders against a trial because of the spiraling costs. Investors have already been told that current legal and other costs will reduce their payout by 40-45 percent.

A spokesman for Signature Litigation said only: "We have not been contacted by any shareholders to continue the action".

Mitchell called a move to settle the case "strange".

RBS, which has denied any wrongdoing in the run-up to its 12 billion pound ($15.45 billion) rights issue in 2008, declined to comment.

One source said a hearing scheduled at the High Court in London on Wednesday will give a formal indication of where the action group stands.

BILL RISES FOR RBS

The bank remains more than 70 percent state-owned since its near collapse during the credit crisis left investors nursing losses of around 80 percent.

RBS, which has settled similar cases with four other investor groups, raised its offer to 82 pence per share, or around 200 million pounds ($258 million), from about 43 pence, the day before the case was due to go to trial two weeks ago.

The final offer remains a fraction of the 200 to 230 pence per share that shareholders paid for RBS shares in 2008 and denies investors the prospect of seeing Goodwin cross-examined in court. Goodwin became a symbol of banker recklessness and greed during the credit crisis.

But lawyers have said the case could have dragged on for years before a court established that RBS was liable for investor losses and quantified any damages.

RBS has already offered around 900 million pounds in other settlements so far to avoid a costly and potentially embarrassing lawsuit.

RBS investors, including thousands of current and former RBS employees, had alleged the bank's former executives deliberately hid its over-stretched finances and failed to disclose that the regulator had ordered it to raise cash when asking investors to stump up a then-record 12 billion pounds.

Just months later, the government was forced to step in with a record 45.8 billion pound bank bailout.

Stephen Allen, a 67-year-old RBS shareholder from the town of Sandy in eastern England, had hoped a trial would "serve as a warning shot across the barrels that no one is beyond the reach of the law".

"As far as I'm concerned the money is a factor, but it isn't the only factor," he told Reuters.

(Additional reporting by Lawrence White; Editing by Keith Weir)

By Kirstin Ridley and Andrew MacAskill