Britain's Lloyds TSB Bank agreed Thursday to take over ailing mortgage lender HBOS in a giant merger sparked by the escalating market turmoil following the collapse of US Lehman Brothers this week.

The mammoth deal, backed by the government, is widely seen as a rescue operation for HBOS, Britain's biggest mortgage lender, and comes amid a near-unprecedented week of financial turmoil which saw a run on the group's shares.

The acquisition, worth 12.2 billion pounds (21.3 billion dollars), is set to create Britain's biggest bank, trading under the Lloyds TSB name, and holding a dominant position on the savings and mortgage market.

The government-backed merger, pushed through against competition concerns during hastily-arranged talks Wednesday, came after the shares of HBOS - or Halifax Bank of Scotland - plummeted by 70 per cent to a low of 88 pence in the market fallout from the Lehman collapse.

"We had no choice, the alternative was very bleak indeed," Alistair Darling, Britain's Chancellor of the Exchequer, said Thursday, confirming the government's close involvement in the deal.

The merger had been "absolutely necessary to ensure stability in the financial system," said Darling.

The government would waive competition requirements to ensure the deal would not be impeded by competition obstacles. "In this case, financial stability must trump competition," he said.

Reports said there had been signs that depositors were preparing a run on HBOS similar to that prompted by the near-collapse of mortgage lender Northern Rock last year, which was nationalized by the government in January.

Darling said there had been "concern about HBOS for a long time," with the situation becoming "more difficult" at the start of this week.

The Bank of England, which Thursday injected a further 40 billion dollars into international markets in concert with central banks worldwide, described the tie-up as part of the "necessary adjustment in financial markets" which was in the interest of financial stability.

HBOS shares rose by 44 per to 212 pence after the takeover plan was revealed Thursday.

Lloyds TSB, Britain's fourth-biggest bank, acquired HBOS in an all-share offer of 12.2 billion pounds, valuing HBOS shares at 232 pence.

Between them, the new institution will have deposits of more than 300 billion pounds from 38 million clients at 3,000 branches across Britain.

But analysts estimated Thursday that as many as 40,000 jobs could be lost from the banks' combined staff of 145,000.

"Significant cost savings can be made by combining the networks and back offices of Lloyds TSB and HBOS," the merger agreement said.

It added that the takeover would result in "cost synergies" of one billion pounds by 2011, or around 10 per cent of the combined cost base.