Still, some suitors are interested in having the U.S. government buy some of Washington Mutual's mortgage-related debt as part of the $700 billion government-backed bailout of financial institutions, sources said.
Getting the bad debt off Washington Mutual's books would make it more attractive to a broader range of suitors, the sources said.
Washington Mutual would prefer a takeover deal "sooner rather than later,'' but no deadline has been set, one source said. The company is not waiting for the bailout plan to be approved by Congress, the source added.
Canada's Toronto-Dominion Bankis weighing a bid for all or part of Washington Mutual Inc, joining a mix of other suitors, the sources said.
TD Bank may bid as part of a group, or may pursue an acquisition of any assets or branches that get divested if another bidder wins the hand of Washington Mutual, one source said.
Others weighing possible takeover bids for Washington Mutual include Banco Santander, Citigroup and J.P. Morgan Chase, the source said.
HSBC and Wells Fargo also have looked at Washington Mutual, other sources told Reuters last week.
It was unclear how interested TD Bank may be since its President and CEO Ed Clark said earlier this month that he was ''extremely cautious'' about U.S. assets and the company was "in pause'' while it integrated its previous acquisition of Commerce Bank.
"If everything was OK, Washington Mutual looks like it would be a great franchise and in fact it would probably be quite consistent with what TD would like to build in the U.S.,'' said Michael Goldberg, an analyst with Desjardins Securities in Toronto.
"I don't think that they'd (TD Bank) have any interest unless there was some assistance from the U.S. government to take over problem assets, in a good bank/bad bank scenario,'' Goldberg said. "If that happened, there could be lots of people interested.''
Washington Mutual, Citi, J.P. Morgan, TD Bank and Wells Fargo declined to comment on the takeover talks. Banco Santander and HSBC could not be immediately reached for comment.
Shares of Washington Mutual fell over 5 percent in afternoon trading on the New York Stock Exchange.
The cost to insure Washington Mutual's jumped significantly Tuesday as credit spreads on all financial companies weakened on uncertainty over government plans to bail out the sector.
"It appears that investors do not believe that the TARP (Troubled Asset Relief Program) will be completed quick enough to help WaMu and furthermore may not provide the support they need anyway,'' said Tim Backshall, chief strategist at Credit Derivatives Research in Walnut Creek, California.
Credit default swaps on WaMu's debt surged to an upfront cost of 54.5 percent the sum insured, or $5.45 million paid upfront to insure $10 million in debt for five years, from 40 percent on Monday evening, according to Markit Intraday. The swaps also require annual payments of 5 percent.
Moody's Investors Service on Monday said it may cut WaMu's credit ratings deeper into junk from "Ba2,'' two steps below investment grade.
"Washington Mutual Bank's deposit rating from Moody's continues to be investment grade,'' Washington Mutual said in a statement.
"It is important to note that Moody's rating actions do not affect the safety of customer deposits, which are insured up to the limits allowed by the FDIC (Federal Deposit Insurance Corp),'' Washington Mutual said.