New Star Asset Management was today in last-ditch talks with its banks which could pave the way for a bidding war for the debt-ridden group.

Founder John Duffield was hammering out the details of a debt-for-equity swap that would see a group of banks led by HBOS take control.

Central to the negotiations is the future of New Star's best fund managers, who Duffield and the banks are desperate to hold on to for the long-term future of the group.

Analysts said a deal to clear the crippling £236 million debt mountain could then trigger interest from rival fund managers looking to pick New Star on the cheap off the banks.

New Star has lost 99% of its market value in the past 18 months and the shares were unchanged at 6¾p today, valuing it at £18 million.

Among those likely to be interested are Robin Geffen of Neptune Investment Management and Martin Gilbert of Aberdeen Asset Management.

Both men are friends of Duffield and have refused to rule themselves out of making a bid this week should the debt problems be solved. They could also be interested in poaching New Star's top performers or buying some of its funds.

A deal between New Star and its lenders would see HBOS, Lloyds TSB, HSBC, Royal Bank of Scotland and National Australia Bank take control of the vast majority of New Star, possibly as much as 90%.

A deal to ensure essential staff do not leave New Star now its shares are almost worthless was central to the talks. Since New Star was set up eight years ago, it has paid its star fund managers a relatively low salary by City standards but made up for it with large share payouts, which have now lost their attraction.

It has been an undignified fall from grace for Duffield, whose rescue attempts have seen his request for New Star shares to be suspended turned down by market regulators and left the banks seemingly holding all the aces.