HBOS has confirmed it is in advanced talks with Lloyds TSB about creating a UK retail banking giant worth over £30bn.

The advanced talks are being encouraged by both the Treasury and Financial Services Authority (FSA) as a deal will ease concerns about the health of the UK banking sector.

News of the takeover comes just two months after HBOS raised £4bn through a rights issue. At the time just 8% of the issue was taken up by investors, leaving underwriters with the bulk of the shares.

HBOS, which was created by the merger of the Halifax and Bank of Scotland in 2001, has come under pressure in recent days amid concerns about its exposure to the US sub-prime market.

As the UK’s largest largest mortgage lender HBOS has been hit by recent weakness in the property market. It also borrows a large proportion of its funding from the wholesale money markets where available funding has been drying up.

On the London Stock market today, HBOS shares climbed as high as 220p and fell as low as 88p during morning trading.