Halifax Bank of Scotland has abandoned its Australian ambitions with the fire sale of BankWest at less than half the hoped-for price and at a £400m loss.

Valued by analysts at between £2.5bn and £3bn, Bank of Western Australia has been sold to Commonwealth Bank of Australia (CBA) for £1.2bn. HBOS was reported to have rejected an offer of just under £2bn earlier this year.

The announcement came amid speculation that the Australian and UK regulators had helped to facilitate the deal. The Australian Prudential Regulation Authority is reported to have been concerned that HBOS's ownership of BankWest had the potential to destabilise the Australian operations.

The St Andrew's Australia insurance and wealth management business is included in the deal, which is said to have the full backing of HBOS's intended buyer, Lloyds TSB.

Colin Matthew, chief executive of HBOS International, said: "The sale of BankWest and St Andrew's at this time is in the best interests of HBOS. This transaction will further enhance the group's capital position and reduce the group's wholesale funding requirements." The bank said the transaction would be "meaningfully capital accretive", adding 0.28% to the group's last stated core Tier One capital ratio at August 31. In the short term, it would create "an immediate and substantial funding benefit of £8bn", the bank said.

HBOS will retain a corporate banking presence in Australia through Bank of Scotland International and asset finance arm Capital Finance Australia, together with the Bank of Scotland Treasury branch. The bank said it would continue to manage these "high quality niche businesses" within the international division.

Alex Potter, analyst at Collins Stewart, said the price was "significantly less than the £3bn we had initially hoped for". Potter, who has stuck to his 375p valuation of HBOS over the past month, insisted the deal was still a positive for the stock.

But he said CBA had acquired BankWest at two-thirds of its tangible book value, compared with the three times book value achieved in the Australian sector's sale of St George Bank to Westpac, which he said was "a similar, though paper-funded transaction".

His note went on: "The loan-deposit ratio of the disposed businesses ... means that the HBOS funding gap' is reduced by just £7bn and not the £16bn we had estimated on the assumption that the entirety of HBOS Australia was sold. Whilst this is still positive, the delays in selling this business and low price means the quantum of benefit is now small."

In Australia, analysts described the deal as one of the all-time bargain buys of Australian banking. "You'd have to say the risk of there being anything significantly awry in this deal for CBA is very slight,'" said one. "We're viewing this as an amazing deal, a real bargain."

CBA's chief executive Ralph Norris said: "Rarely have we seen a quality asset such as BankWest become available on such attractive terms to us."

Bank of Scotland bought BankWest in 1995 under governor Sir Bruce Pattullo and chief executive Peter Burt, claiming it was a springboard for growth in the Far East.

Only 15 months ago, HBOS chief executive Andy Hornby unveiled a plan to open 160 branches on the east coast of Australia.