HBOS shares surge in takeover hope

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HBOS slumped 14% on Tuesday after fears the takeover deal could have to be repriced to satisfy Lloyds' investors.

But in a stronger session for the London market, both banks were bolstered by support for the takeover deal from Prime Minister Gordon Brown, who is "confident" it will go ahead.

Lloyds TSB also rose more than 10%.

There still remained a big gap between Lloyds TSB's offer and the HBOS share price. Under the terms of the takeover, Lloyds is paying 0.83 of its own shares - currently equivalent to 207.5p - for each HBOS share, which closed at 148.1p.

Rival bank shares also firmed as investors looked ahead to the expected approval of a 700 billion US dollar (£383 billion) banking bail-out in the US. Barclays added 4%, and First Direct owner HSBC 2%.

Gains for Royal Bank of Scotland were less than 1%.

The wider FTSE 100 Index ended the day up 1.2%, after even more impressive gains ebbed away in response to sizeable opening losses for Wall Street's Dow Jones Industrial Average ahead of the crucial Senate vote on the rescue package. US shares were also depressed by some worse-than-expected US manufacturing data.

Concerns that the Lloyds TSB-HBOS deal might have to be repriced arose due to the difference between the Lloyds offer figure and HBOS's share price. The gap has been seen as an indication that the market is dubious about the prospects of a deal at the current price, as Lloyds TSB shareholders, who have to approve the takeover, may not be keen to pay such a big premium for struggling HBOS.

But a note from analysts at Credit Suisse played down the difference, and highlighted the interests of institutional investors with stakes in both banks in securing a deal.