£1.26bn Spanish bid swoop for beleaguered A&L

Banco Santander, which bought Abbey for £9.5 billion in 2004, ended years of speculation about the future of A& L with a bid worth 299p a share.

The price - which hits 317p a share once the 18p dividend is included - shows just how far from grace the British banking sector has fallen.

Just two years ago, Crédit Agricole of France considered paying £13 a share for A&L - or £5.8 billion.

A&L shares have plummeted since then but jumped 101¾p to 321p today - a rise of 47%.

Under the terms of the proposed deal, A&L shareholders will receive one share in Santander for every three they own in the British firm.

Analysts believe other bidders may emerge and said it could spark a wave of deals in the banking sector. Lloyds TSB has long been linked with a move for its smaller rival.

The Financial Services Authority is encouraging consolidation as it seeks to bolster British banks that have been battered by the credit crunch. It is desperate to avoid another Northern Rock-style collapse.

Shares in Bradford & Bingley, which is currently raising £400 million from shareholders, jumped 10% on hopes it will be next in line for an approach. Halifax owner HBOS has also gone cap in hand to the City for funds.

A&L, run by chief executive David Bennett, took a £400 million hit in the first three months of the year as its assets tumbled in value.

Acting chairman Roy Brown today said the business was "strong" but added: "The board is acutely aware of the significant external risks presented by the deterioration in economic conditions and the continuing turbulence in the financial market.

"Against that backdrop, the proposal from Santander represents value for shareholders and the combination of A&L with Santander's UK operations is an excellent fit."

The combination of Abbey and A&L will give Santander about 14% of the UK mortgage market, making it Britain's second-largest lender behind the Halifax.

Emilio Botin, chairman of Santander, said the deal was a "significant step" for the Spanish firm in the UK. It has echoes of its takeover of Abbey, which happened after the High Street bank ran into difficulties of its own.

A&L has been rocked by the carnage in financial markets around the world and by the meltdown of the mortgage market in the UK.

It has also seen board upheaval this year with Bennett forced to take time off ill. Last week it appointed Alan Gillespie as its permanent new chairman following the death of previous incumbent Sir Derek Higgs in April.

The deal with Santander was seen as a major vote of confidence for the British banking system after one of its worst periods. The collapse of Northern Rock - which included the first run on a British bank since Victorian times and subsequent nationalisation by the Government - seriously damaged the reputation of the City.