Lloyds TSB is talks with HBOS to create a UK retail banking giant worth £30bn, according to the BBC, which would end the uncertainty about the strength of Halifax-Bank of Scotland after a run on its shares.

BBC business editor Robert Peston believes the news of a merger could be announced within 24 hours, adding that the prime minister, Gordon Brown, was involved in the negotiations, which have the blessing of UK authorities.

As of yet, HBOS and Lloyds have declined to comment.

The advanced talks are being encouraged by both the Treasury and Financial Services Authority (FSA) as the deals will help to ease concerns about the UK banking sectors health.

This last week the effects of the credit crunch have seen the worldwide banking industry in chaos. Lehman Brothers, America’s fourth-largest investment bank, filed for bankruptcy protection, dealing a hard blow to the weak global financial system. The US Treasury stepped in to save the day with an $85bn rescue package to bail out AIG amid fears the group could face collapse.

Bank of America bought Merrill Lynch in a $50bn deal – making Merrill the third top US investment bank to fall prey to the sub-prime crisis within six months.

Mr Peston said there was a real concern that any run on HBOS shares would create enough fear among the bank’s financiers - providers of wholesale credit who give the bank its money - for there to be a withdrawal of credit for HBOS.

“Clearly the watchdog and Treasury will welcome a deal as it will put the bank on a sounder footing,” he said.

“The last thing they want is a fully fledged crisis.”

Peston said Gordon Brown has been involved because, “It was not in the government’s interest for there to be the faintest risk that it would have another Northern Rock on its hands,” he added.

This morning HBOS shares have swung from high to as low as 88p. If the buyout were to be confirmed it would create a banking giant that would be able to cope with the current crisis hitting financial markets across the globe.