Lloyds TSB is reportedly in talks to buy fellow British bank HBOS, in deep trouble on the stock market amid the crisis engulfing global financial markets, it emerged on Wednesday.
The BBC reported that HBOS, Britain's biggest provider of home loans, was in advanced talks for it to be bought by Lloyds TSB.
The price of HBOS shares has moved wildly this week, falling by about 50 percent, but then surging on the reported takeover talks, only to ease again.
The financial services regulator has said it is fundamentally sound.
Spokesmen for both banks declined to comment on the speculation, but the news sent HBOS shares surging higher on markets still reeling from the bankruptcy of US investment banking giant Lehman Brothers.
Heavy losses earlier on Wednesday prompted Britain's FSA financial watchdog to issue a statement saying that the group was well-funded, in an attempt to avoid a flood of savers trying to withdraw their money.
Prior to the report on the BBC website, HBOS shares had nosedived 52 percent to a low of 88 pence, as investors fretted over the state of the global banking sector despite news of a rescue for troubled US insurer AIG.
However, the Lloyds TSB takeover report helped push the bank's stock back into the black, at one point rising to 220 pence.
At 1045 GMT, HBOS stock was at 189.10 pence, a rise of 3.90 percent on the start of trading.
"Since the beginning of the current extreme difficulties in the financial markets, the Financial Services Authority has worked intensively with all major UK banks to ensure they have credible capital and liquidity plans," the FSA said in a brief statement.
"We are satisfied that HBOS is a well-capitalised bank that continues to fund its business in a satisfactory way."
The value of shares in HBOS, which was created by the merger of Bank of Scotland and Halifax in 2001, had slumped by a total of 36 percent over the course of Monday and Tuesday.
But HBOS has argued this week that it is robust and able to fund itself.
It has 258 billion pounds (324 billion euros, 461.5 billion dollars) of savings and the strongest capital ratio, the most common measure of bank strength, of its domestic rivals.
Lloyds TSB chairman Victor Blank is reported to have discussed the merger proposal with Prime Minister Gordon Brown, who is grappling with an almost unprecedented period of economic and financial market turmoil.
It is thought that an announcement on the deal could come later Wednesday.
The BBC said the FSA and the British Treasury would welcome a tie-up between TSB and HBOS "as it will put the bank on a sounder footing".
It said that under the terms of the proposed takeover HBOS shares would be worth "considerably more" than their current level of 100 pence.
A buyout would create a banking colossus that should be able to cope with the current crisis.
It would also give Lloyds access to a larger share of the British mortgage market -- HBOS currently issues one in five of all new home loans.
London's FTSE 100 leading shares index also experienced extremely choppy trade on Wednesday. In late morning deals, the FTSE showed a gain of 1.24 percent at 5,088.00 points.