London - A potentially giant banking merger loomed in Britain Wednesday as top mortgage lender HBOS confirmed it was in "advanced talks" with Lloyds TSB, the country's fourth-biggest bank.

Confirmation of the merger talks, coming after days of HBOS shares being buffeted in the aftermath of the collapse of US bank Lehman Brothers, was met with surprise in London's financial district.

Analysts raised competition issues and said the move smacked of panic, as it emerged that the government and the Financial Services Authority (FSA) were backing the merger talks amid concerns over a possible run on HBOS - or Halifax Bank of Scotland.

"They are afraid that HBOS could become Northern Rock mark 2," City analyst Will Hutton told the BBC in a reference to last year's collapse of British mortgage lender Northern Rock.

Reports said Prime Minister Gordon Brown had given his personal backing to a tie-up, and the government would legislate to "overcome any competition obstacles."

The share price of HBOS, which covers 25 per cent of the mortgage market in Britain, fell by up to 50 per cent on the stock market this week, with speculators targeting its exposure to the effects of falling property prices, rising home repossessions and a generally weakening economy.

Analysts said they were puzzled by the Lloyds TSB move which could increase the bank's exposure to the volatile mortgage market.

If a merger is agreed it would create a bank with a market value of 30 billion pounds (53 billion dollars), by far the biggest on the British High Street.

It would have 3,000 branches, 38 million customers and 142,000 employees, and thus hold a dominant position in the mortgage and savings market.

Meanwhile, it was was confirmed Wednesday that Britain's Barclays bank has agreed to buy some of the core assets of Lehman Brothers in the US for 1 billion pounds 
(1.75 billion dollars).

Barclays, Britain's third-biggest bank, had bought Lehman's North American investment banking and trading unit for 250 million dollars, and paid 1.5 billion dollars for its New York headquarters and two data centres following negotiations in New York.

The deal, regarded by Barclays as the "opportunity of a lifetime," followed the bank's withdrawal last weekend from negotiations on a rescue package for Lehman Brothers.

It is understood to aid the rescue of 10,000 jobs at Lehman Brothers in the US, but none of the 5,000 at risk at the stricken bank's subsidiary in Britain. (dpa)