Santander in failed M&T talks on U.S expansion -FT

* Talks broke down over control dispute - FT

* Santander has made clear it is looking for U.S. buys

* Santander shares down 4.3 percent

MADRID, May 19 (Reuters) - Spanish bank Santander (SAN.MC) would not comment on Wednesday on a report it held talks, which failed, on merging its U.S operations with M&T Bank Corp (MTB.N) to continue its expansion in the northeast United States.

Talks were at an advanced stage before failing over a disagreement as to who would control the enlarged unit, with a likely deal seeing the Buffalo, New York company merging with Santander's fully owned U.S bank, Sovereign, the Financial Times reported on Wednesday, citing people close to the discussions.

The euro zone's largest bank has said previously it was targeting bank acquisitions in the United States over the next few years. The well-funded bank, which has so far avoided the worst of the credit crisis which has crippled rivals, completed its takeover of U.S. bank Sovereign Bancorp Inc last year.

Santander's core capital ratio stood at 8.8 percent at the end of March, one of the highest in the Spanish sector and near the average of its European peers.

Chief executive Alfredo Saenz has said in the past the bank was targeting expansion in Massachusetts, New York and Pennsylvania.

Any U.S. buy would likely be merged with Sovereign to extract more value from Santander's U.S. operations and fulfill acquisitive-hungry, 75-year-old chairman Emilio Botin's desire to be a mayor player in the markets he operates in.

"Obviously one of the aims of the bank is to increase its size to extract maximum value from the acquisitions it has made in the United States," said Madrid-based strategist Francisco Salvador of Iberian Equities.

Sovereign and M&T are broadly similar in size. Both have about 750 branches and M&T has assets of $69 billion and Sovereign had $72 billion.

M&T, established in 1856 as Manufacturers and Traders Bank, has a market value of $10.4 billion. It has 14,000 employees in New York, Pennsylvania, Maryland, New Jersey, Washington D.C., Virginia, West Virginia and Delaware.

Its shares have risen by a quarter this year and have more than doubled from a low in March 2009.

Santander would take a minority stake in M&T by acquiring the 22.5 percent that Allied Irish Banks (ALBK.I) is looking to sell, but wanted to control the combined unit, the paper said.

A spokeswoman for Allied Irish Banks declined to comment on the report on Wednesday. M&T could not be reached for comment.

Allied Irish has said previously it had been approached by a number of companies interested in taking a strategic stake in the entire group, and that the potential suitors were especially interested in the value of its overseas units. [ID:nLDE6201R9]

"While the failure to transact appears a negative in the short term, clearly discussions have been taking place, so we would be hopeful for a transaction in due course," said Eamonn Hughes, analyst at Dublin-based Goodbody Stockbrokers.

Santander shares were 4.2 percent lower at 0920 GMT, outpacing falls in Spanish blue-chips .IBEX, 3.4 percent lower. Its shares have been volatile of late as hedge funds use the stock as a proxy for Spain, racked by doubts over the country's sovereign risk.

Allied Irish Banks were 6.4 percent lower. M&T Bank closed Tuesday trade 4.8 percent lower. (Reporting by Sonya Dowsett; Additional reporting by Andras Gergely in Dublin, Tracy Rucinski in Madrid; Editing by Dan Lalor)