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Britain鈥檚 largest mortgage lender HBOS confirmed this afternoon it had entered merger talks with Lloyds TSB following frenzied speculation over the future of the company.

In a statement to the stock exchange the firm said it 鈥渃onfirms that it is in advanced talks with Lloyds TSB Group plc which may or may not lead to an offer being made for HBOS.鈥�

The statement, made in response to 鈥渕arket speculation鈥�, follows a morning in which shares in the company initially collapsed in half on the back of overnight concerns over the business.

However shares then soared to 215p as the BBC broke the story that it was engaged in discussions with Lloyds over a merger designed to rescue the ailing bank, which could value HBOs shares at as much as 拢3.

Shares then slumped again as the BBC retracted the price claim, saying the value could be closer to 拢2.

Shares in the firm were trading at 168p at 3pm, 7.7% down on its 182p opening price this morning.

According to press reports senior government, Financial Services Authority and Bank of England figures have been involved in brokering the deal, including the prime minister Gordon Brown. Lloyds may require reassurance that any deal would not fall foul of the UK鈥檚 competition authorities.

The deal is key to the construction sector as HBOS is a major lender to UK housebuilders, as well as the commercial property industry. Housebuilders will have their eye on the impact on the volume of mortgage lending, and whether Lloyds more conservative attitude to mortgage lending will be brought to bear on Halifax鈥檚 20% share of the market.

Many housebuilders have blamed the current housing downturn on the inability of potential buyers to raise finance for loans, because of restricted lending practices by banks.