LONDON - BRITAIN'S Lloyds TSB sealed a 12.2 billion pound (S$31 billion) deal to buy HBOS Plc to create a dominant mortgage and savings bank, encouraged by the government amid fears turmoil in financial markets would claim another UK victim.

Lloyds will offer 0.83 of its shares for each HBOS share, valuing them at 232 pence based on Wednesday's closing price of 279.75p, a 58 per cent premium over HBOS's last price of 147.1p.

By 0710 GMT, HBOS shares were up 25 per cent at 184p while Lloyds shares dipped 3 per cent to 268p, trimming the value of the deal to 222p per HBOS share.

The bank said it expects the deal to boost annual earnings by over 1 billion pounds a year by 2011 through cost savings and boost its earnings per share by over 20 per cent a year.

Lloyds CEO Eric Daniels will remain as chief executive of the enlarged group and Victor Blank will stay as chairman.

The UK government said it intends to smooth regulatory approval of the takeover - despite the enlarged group having a 28 per cent share of mortgages - to ensure the stability of the UK financial system. Alistair Darling, UK finance minister, said he fully supported and welcomed the deal.

But Mr Daniels denied it was a government-brokered rescue of its rival, and said the banks have been in talks for several weeks.

'There shouldn't be any impression this is a shotgun marriage or a forced marriage, this is something that's been looked at for a good long while.

'Our most recent set of conversations have taken place over the last several weeks,' Mr Eric Daniels, chief executive, told reporters on a conference call.

Lloyds said the combination will strengthen its ability to serve UK customers in current difficult markets. It follows a plunge in HBOS's share price in the last six days amid fears about its funding position.

Lloyds' core tier 1 capital ratio - a key measure of financial strength - will fall to 5.9 per cent due to the deal, and Daniels said he is targeting a ratio of between 6 and 7 per cent and will pay this year's final dividend in shares, rebase the dividend next year and consider asset disposals on top of the cost savings to achieve this.

He declined to comment on what assets could be sold. HBOS's Australian arm Bankwest could be sold, analysts have said.

Mr Daniels said there will be job cuts, but reports it could result in 40,000 redundancies 'sounds very much on the high side'. -- REUTERS