UPDATE 1-Australia's CBA in talks to buy ABN AMRO unit

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SYDNEY, July 23 (Reuters) - Commonwealth Bank of Australia Ltd (CBA.AX: Quote, Profile, Research), the nation's second-biggest lender by assets, is in talks to buy ABN AMRO's Australia and New Zealand operations, looking to strengthen its institutional banking and markets business, the bank said in a statement on Wednesday.

On Tuesday, National Australia Bank Ltd (NAB.AX: Quote, Profile, Research) dropped out of the race to buy ABN AMRO Australia Holdings, a unit of Dutch bank ABN AMRO, which analysts value at about A$800 million ($777 million).

The unit is being sold by a consortium led by Royal Bank of Scotland (RBS.L: Quote, Profile, Research), which bought the Dutch bank last year.

CBA said its proposal was incomplete and subject to further negotiations. A final agreement would require board, competition and regulatory approval.

The bank has entered into a period of exclusivity around negotiations and due diligence with Royal Bank of Scotland.

The ABN AMRO Australian and New Zealand Businesses would be complementary to Commonwealth's institutional and markets business, the bank said.

Last year, a consortium comprising Royal Bank of Scotland (RBS.L: Quote, Profile, Research), Spain's Santander (SAN.MC: Quote, Profile, Research) and Belgian-Dutch Fortis (FOR.BR: Quote, Profile, Research) bought ABN AMRO for about $99.4 billion. The consortium has been looking to sell some assets to strengthen stretched balance sheets.

Commonwealth Bank and Japan's Nomura Holdings (8604.T: Quote, Profile, Research) were tipped as potential bidders for the ABN's Australian and New Zealand business after NAB withdrew. ($1=A$1.03) (Reporting by Mette Fraende and Denny Thomas; Editing by James Thornhill)