Delaware stands to leave up to $40 million in homeowner relief on the table, if it does not join a multi-state mortgage settlement, according to a letter from the state's banking commissioner seen by Reuters on Tuesday.

In a sign of internal strife as holdout states decide whether to join the settlement, Delaware banking commissioner has come out in support of the deal, while the state's attorney general remains on the sidelines, for now.

Delaware homeowners would receive some $32 million in relief, and the state would receive $8 million to provide housing counseling and foreclosure prevention services, according to the letter.

Delaware Attorney General Beau Biden, who is the son of U.S. Vice President Joe Biden, has said he has been opposed to the settlement as it is drafted, and wants to make sure he can preserve his lawsuit against MERS, the banks' mortgage electronic registry, which he filed last year.

MERS is not a party to the settlement, but the proposed deal is expected in part to resolve claims against the banks for their use of MERS.

In a statement provided to Reuters on Tuesday, Biden's office said he continues to consider the terms of the settlement and advocate for improvements that address his concerns.

But the state's banking commissioner, Robert Glen, in a letter dated Monday, said he would support the nationwide deal because it provides immediate, substantial relief to struggling homeowners nationwide and in Delaware.

It is unclear if Delaware would still get some relief even if Biden does not sign on. Glen said in his letter that not all of the benefits would be available to Delaware in the absence of the attorney general's agreement.

State attorneys general faced a Monday deadline to report whether they planned to support the settlement. State banking commissioners, too, had to report their position to the Conference of State Bank Supervisors by February 6.

Late on Monday Iowa Attorney General Tom Miller, who is leading the settlement negotiations on behalf of the states, said more than 40 states agreed to join the deal, though the rest, including Delaware, remain holdouts.

States - including Delaware, California and New York - and several activist groups have criticized the terms of the proposed deal as too lenient toward the banks.

Under a settlement that state and federal officials have spent more than one year negotiating with top U.S. banks, the banks would resolve civil government claims about improper foreclosures and abuses in originating and servicing mortgage loans.

In exchange, the banks - Bank of America , Wells Fargo & Co , JPMorgan Chase & Co , Citigroup and Ally Financial Inc - would pay up to $25 billion, much in the form of cutting mortgage debt for distressed homeowners.

The banks would provide $17 billion in loan modifications for delinquent borrowers; $3 billion in refinancing for homeowners who are current on their payments but unable to refinance because they owe more than their homes are worth; and around $1.5 billion in direct payments of up to $2,000 each to borrowers who lost their homes to foreclosure, according to Glen's letter.

Participating states will also receive a total of $2.5 billion for housing programs.

In his letter Glen said: I recognize and respect that our Attorney General has expressed his concern with the agreement. However, I am not aware of an alternative plan that will render better or more immediate results for Delaware.

Glen and the Conference of State Bank Supervisors did not immediately respond to requests for comment.

(Reporting By Aruna Viswanatha in Washington, D.C. and Rick Rothacker in Charlotte N.C.; Editing by Tim Dobbyn)

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