Potential HBOS and Lloyds TSB tie-up bolsters FTSE

Excitement over a potential tie-up between high street banking giants HBOS and Lloyds TSB put the London market on firmer ground today after two days of turmoil.

The speculation helped shares in the UK’s biggest mortgage lender recover after an early sell-off on funding fears sent it plummeting to an 88p low.

The FTSE 100 Index rose 66.1 points to 5091.7 by the mid-session, with confidence helped by the $85bnUS Government bail-out of insurance giant AIG.

The banking sector was firmly in the spotlight as HBOS swung wildly between 20% advances and 50% losses on another dramatic day.

In mid-session trading, HBOS was 3% ahead, or 5.2p, to 187.2p with potential merger partner Lloyds TSB up 18%, or 51.5p at 331.25p. Rumours also surfaced of possible interest in HBOS from HSBC – down 3.5p to 836.25p – on another feverish day.

Barclays, which confirmed today that it was buying some Lehman Brothers assets including its North American investment banking business, also received a boost, soaring 15%, or 46.25p to 354.25p.

Banks had been under pressure in unusually turbulent trading after opening, with the wider Footsie swinging between positive and negative territory.

Elsewhere in the sector Royal Bank of Scotland added 1.8p to 190.9p. In the FTSE 250 Bradford & Bingley rose 0.75p to 30.75p after hitting record lows earlier in the session after a ratings downgrade from Moody’s.

Insurers were also on steadier ground after a rocky past two days on the Lehman and AIG concerns. Aviva rose 20p to 480p and Legal & General moved 3.2p higher to 91.7p. Prudential was 17.75p better off at 504.5p.

Miners meanwhile offered some support to the top flight with Lonmin leading advances, up 161p to 2703p. Rio Tinto – also on the risers board – gained 131p to 4003p.

A brief recovery in crude prices after two days of steep falls helped BP add 8.25p to 484.25p, with fellow heavyweight Royal Dutch Shell up 31p to 1595p.

But confidence in the retail sector was not helped by details of a near £100 million half-year loss at high street chain Woolworths. Shares in the group were 0.16p lower at 5.9p.

In choppy trading, FTSE 100 firm Next fell 15p to 1118p but in the second tier Currys owner DSG International added 4.75p to 54.25p and Debenhams was 3.5p better at 45.5p.