Brown orders merger bid to save Halifax

Lloyds TSB is in talks to merge with HBOS in the biggest banking rescue in British history.

The emergency discussions have been personally overseen by Gordon Brown and came as HBOS shares plummeted for a third day, at one stage wiping 50 per cent off the value of Britain's biggest mortgage lender.

But the turmoil in world markets showed no sign of abating with the Dow Jones falling 189 points on fears that investment banking giant Morgan Stanley will be the next victim. A merger of HBOS and Lloyds would create a superbank with assets of around £1trillion. Staff at HBOS's London headquarters said there was "a feeling of trepidation" about its loss of independence. It is almost certain to result in substantial job losses.

The talks were ordered by the Prime Minister as speculators launched waves of attacks against HBOS, which owns former building society Halifax and the Bank of Scotland as well as Birmingham Midshires, Clerical Medical and Intelligent Finance. Mr Brown is understood to have spoken first to Lloyds TSB chairman Sir Victor Blank, who he has known for many years, at a City function on Monday night. The Prime Minister also contacted HBOS chairman Lord Stevenson, who is an adviser to the Government on education.

One senior government figure said: "We are very confident this will happen. It is an amazing deal for Lloyds TSB. If this doesn't go through then we are running out of ideas."

HBOS issued a statement confirming the talks this afternoon. It said: "In the light of market speculation, the Board of HBOS confirms that it is in advanced talks with Lloyds TSB Group which may or may not lead to an offer being made for HBOS."

The deal is said to value HBOS shares at £3 each, roughly the price they stood at on Friday before this week's stock market frenzy. HBOS shareholders would be paid in Lloyds shares rather than cash, according to the BBC.

A merger would create a banking giant with around a third of all current accounts in Britain and 28 per cent of the mortgage market. Normally such a combination would expect to fall foul of the competition authorities in Britain and Brussels. However, given the extreme gravity of the situation, the deal is likely to be waved through.

Reports of the merger talks helped lift shares in HBOS. Lloyds TSB shares were also up. The latest developments in the City overshadowed another day of economic bad news. Unemployment rose by 81,000 to 1.72 million, its highest level since 1999.

At HBOS's London headquarters staff said they had been told little about what is to happen to the bank.

Business consultant Tearri Richards, 33, said: "I think there is a feeling of trepidation. Communication is limited at this stage. We have been told it is a difficult time but the balance sheet shows there is a resilience. I think HBOS is bearing a lot of the brunt for wider industry problems. Regulation has been part of the problem and also contagion."