Rumours in the City of London are suggesting that Lloyds TSB is in advanced merger talks with HBOS to create a UK retail banking giant worth £30bn.
HBOS is the UK's biggest mortgage lender but in recent weeks has seen a run on its shares.
News of a merger, valuing HBOS shares at around 200 pence each could be announced within the next 24 hours.
The Treasury and Financial Services Authority (FSA) are said to approve as a deal will ease concerns about the health of the UK banking sector.
A buyout would create a banking giant that would be able to cope with the current crisis hitting financial markets across the globe.
While Lloyds would gain access to a larger share of the UK mortgage market, it would also be a case of "the bigger the better" as it would leave the enlarged bank on a sounder financial footing.
On Tuesday, the US Treasury was forced to bail out insurer AIG with an $85bn (£45bn) rescue package, US investment giant Lehman Brothers collapsed on Monday and Merrill Lynch was sold to Bank of America in a $50bn deal.
HBOS is the parent company of Bank of Scotland and the Halifax.
