Shares in Lloyds Banking Group rose 5% today on hopes the Government will finally insure more than £250 billion worth of its most toxic assets.

They were up 2.6p at 42.9p, having almost halved in value since last Friday during a week of frantic negotiations between the bank and the Treasury over the terms of the bailout.

Investors were today hopeful a deal was close, but were wary of another heavy sell-off if agreement is not reached.

Peter Hahn, a former Citigroup banker and now Fellow of Finance at Cass Business School, said: "The market is losing confidence and the longer it takes the worse it is for the bank. Lloyds has to do a deal."

Chancellor Alistair Darling has proposed insuring £258 billion of toxic assets held by Lloyds - but at a heavy price.

The Treasury wants to increase its stake in the bank from 43% to as much as 70% by converting costly preference shares it holds into ordinary shares, and by charging a fee.

Lloyds, furious that details of the potential deal were leaked overnight, was today haggling for better terms.

Royal Bank of Scotland signed up to the Asset Protection Scheme last week when it asked the Government to insure £325 billion of assets in exchange for a stake that could rise to 95%.

City experts warned that Lloyds - created by the merger of basket case HBOS with Lloyds TSB - was not in a strong negotiating position.

Chief executive Eric Daniels last month reported losses of £10.8 billion at HBOS, mostly due to a disastrous deterioration at the Bank of Scotland corporate lending business.

James Hamilton at Numis Securities said: "Lloyds is in a fairly desperate state and that puts it in a pretty weak position."

The taxpayer already controls 43% of Lloyds after the Government injected £17 billion of emergency funding at the time of the merger.

If the stake rises above 50%, pressure will mount on Daniels and his chairman Sir Victor Blank who brokered the deal - now widely seen as a disaster - with Gordon Brown.

A Lloyds spokesman said discussions were ongoing: "This is a complex issue and there remains a considerable amount of detail to be worked through.

"We have not yet concluded our discussions, and there can be no certainty about the outcome. Our objective is to secure the best possible deal for our shareholders."