Lloyds TSB is in advanced merger talks with HBOS to create a UK retail banking giant, the BBC has learned.
The deal would end uncertainty about the strength of HBOS following the calamitous run on its shares.
The valuation of HBOS shares would be closer to last week's closing price of 300 pence rather than their current level of around 100p.
Both HBOS and Lloyds declined to comment on the news, broken by BBC Business Editor Robert Peston.
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Authorities are keen to support the proposed takeover as it will ease concerns about the health of the UK banking sector.
Deal welcomed
"The last thing they want is a fully fledged crisis," the Business Editor said.
He added there was a real concern that any run on HBOS shares would create enough fear among the bank's financiers that there would be a withdrawal of credit for the bank.
"Clearly the watchdog and Treasury will welcome a deal as it will put the bank on a sounder footing," Mr Peston said.
HBOS shares rose by 15% having earlier slumped by as much as 56% on the London market.
Shares had a roller coaster ride in early trade, falling sharply amid speculation that the bank's future was in question.
However, as news of the merger talks emerged, shares recovered some of their losses.
HBOS is the parent company of Bank of Scotland and the Halifax, and is the UK's biggest mortgage lender.
(BBC)
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