The Edinburgh lender, which is 83% state-owned following a series of bailouts from November 2008, wants to cut funded balance sheet assets in its global banking and markets division to £300 million ($459.4 million) from £420 billion as at June 2011.

This will entail up to 3,500 further job cuts in the U.K. and overseas, in addition to 2,000 layoffs in the second half of 2011, Royal Bank said.

The restructuring forms a dramatic extension to a series of cuts CEO Stephen Hester initiated in February 2009. It comes after global banking and markets profit and revenue plunged in the past two quarter and as impending regulatory changes threaten to make investment banking costlier. The cuts will shift the bulk of Royal Bank's business to U.K. and U.S. commercial and retail banking and sound the final death knell of its erstwhile ambitions to operate a global, full-service investment bank.

Hester had flagged potential cuts in November and sustained further pressure to make changes when Chancellor of the Exchequer George Osborne demanded it pare down its investment banking unit further.

Hester said that "it is clear that, particularly in the wholesale banking arena, significant new pressures have emerged."

"The changes we are announcing today seek to ensure that RBS is at the front of the pack in pursuing a strategy that reflects the environment we expect to operate in," he added in the statement.

By mid-morning in London Royal Bank's shares were up 7.5% at 23.42 pence, giving the bank a market value of £25.8 billion.

Royal Bank said it will sell or close its merger and acquisitions business, along with its Hoare Govett Ltd. corporate broking division, cash equities and equity capital markets operations. Together these had income of about £220 million in the nine months to September 2011 and are unprofitable, Royal Bank said.

The mergers and acquisitions advisory business is a relative minnow, ranking as the U.K.'s No. 17 by deal volume in the nine months to Sept. 30, according to figures from Experian's CorpFin Worldwide. By value Royal Bank ranked No. 13, having advised on £18.5 billion of transactions in the period. Recent mandates have included advising a Cheung Kong Infrastructure Holdings Ltd. consortium on the £5.8 billion purchase of the U.K. power grid of Electricité de France SA in 2010.

The investment banking cuts will result in the reorganization of Royal Bank's wholesale businesses into "markets" and "international banking" divisions. The Scottish lender said within those units it will focus on fixed income, foreign exchange, debt financing, transactions services and risk management solutions.

Royal Bank of Scotland has enlisted Lazard to help sell the investment banking operations.

Hester said it's in talks with a number of bidders but said sales aren't guaranteed. A request for further information about the businesses on the block was left with Royal Bank representatives.

No bidders have yet confirmed their interest in any of the assets but potential suitors for Hoare Govett or other operations could include Royal Bank of Canada; Mizuho Securities Co. Ltd.; Nomura International plc; Barclays plc; Oriel Securities Ltd.; Numis Securities Ltd.; Canaccord Financial Inc.; Bank of China; Hay Tor Capital, a little-known firm headed by former Goldman Sachs trader John Ashdown; and Australian institutions.

Global banking and markets CEO John Hourican will run the markets and international banking businesses, Royal Bank said. The two business units will target a return on allocated equity exceeding the cost of capital, currently estimated at 12%, in the medium term.

The return on equity at global banking and markets had fallen to 11% in the first nine months of 2011, down from 19% a year earlier. The unit's nine-month operating profit was £1.66 billion, compared with £2.34 billion a year earlier. Divisional revenue fell more than 20% to £5.03 billion.

The global banking and markets unit employed 18,900 as of Sept. 30.

Royal Bank promised further information on its restructuring at its Feb. 23 full-year results presentation.