UPDATE: HBOS has Merged with Lloyds TSB - Deal Secured
Lloyds TSB is to merge with HBOS, creating a banking giant which will hold close to a third of the UK's savings and mortgage market.
Both firms' boards have agreed to a deal, at a price of 232p per HBOS share, following talks.
The deal should calm uncertainty about the strength of Halifax-Bank of Scotland after a run on its shares.
The deal is set to be formally announced on Thursday morning, says BBC business editor Robert Peston.
The talks between the two banks were first reported by the BBC earlier on Wednesday.
With 20% of the UK mortgage market, HBOS is currently the country's largest mortgage lender. Lloyds ranks fourth with an 8% share.
On the London market on Wednesday, HBOS shares fluctuated wildly, climbing as high as 220p and falling as low as 88p.
Shares in the lender eventually closed 19% lower at 147.10p while Lloyds ended unchanged at 279.75p.
Halifax Bank of Scotland Group one of the "Big Five" in UK banking has seen its share prices plunge for the second day running, after "Black Monday" when US giant Lehman Brothers filed for insolvency and 16,000 jobs in London were axed at a stroke.
Both Lehman Brothers and HBOS had heavy hedge funding in convertible bonds and derivatives in the US subprime mortgage debts. The fear spreading throughout the libor inter-bank lending industry is that there is a massive black hole propping up the "junk debt" markets and that other leading finance houses will collapse like a house of cards. Bank of England has reacted by injecting another £20 billion into the banking economy.
Halifax Bank of Scotland (HBOS) has sought to reassure investors over its funding, but failed to prevent its shares slumping for the second day in a row.
Britain's biggest mortgage lender's stock fell almost 40% at one point before closing 22% lower - making it by far the worst performer in the FTSE 100 Index on Tuesday.
Shares in the bank closed at 282p on Friday but have lost more than a third of their value in two days following the turmoil at Lehman Brothers.
Analysts have said HBOS needs to refinance more than £100 billion of funding during the coming months - which could be more challenging after the blow to confidence from Lehman's demise.
Inter-bank lending rates also increased, making funding more expensive.
HBOS was also downgraded by a ratings agency, but said it was "very confident" about its funding position.