British bank Lloyds TSB is in advanced talks to buy its peer Halifax Bank of Scotland (HBOS), whose share price collapsed this week.

The news sent HBOS shares surging higher, after heavy losses in earlier trade that prompted Britain's Financial Services Authority to issue a statement saying that the group was well funded.

Spokesmen for both HBOS and Lloyds TSB declined to comment on the talks.

HBOS shares had fallen 52 per cent on Wednesday to a low of $1.58, as investors fretted over the state of the global banking sector despite news of a financial rescue for AIG, the giant US insurance company.

However, the Lloyds TSB takeover report reversed the earlier HBOS and Lloyds TSB share losses.

Europe markets

Meanwhile, volatile trading sent European stock markets on a roller coaster early on Wednesday, after the US Federal Reserve announced its rescue of bankuptcy-threatened AIG.

London's FTSE 100 index of leading shares was up 1.26 per cent to 5,089.10 points at mid-morning, swinging up again after reversing its initial gains, in a trend mirrored on other European markets.

In Paris, the CAC 40 was up 0.29 per cent to 4,099.36 points and Frankfurt's DAX 30 rose 0.25 per cent to 5,980.17, having both switched into losses earlier in the morning.

Russia's leading RTS stock market suspended trading following a plunge of six per cent, a stock market spokeswoman said.

Russia also moved to support the country's increasingly stressed banking sector, with the finance ministry in Moscow raising lending for the country's top banks,  Sberbank, VTB, and Gazprombank, to $44.9bn.

The banks will be loaned federal funds for a minimum of three months, the ministry said.

'Better co-operation'

Central banks in Switzerland, Russia and Japan also poured more short-term cash into the markets, hoping to restore confidence between banks and encourage lending between them.

Credit markets had tightened on Monday, following the collapse of the investment house Lehman Brothers and central banks had already injected billions of dollars on Monday and Tuesday in an attempt to turn the tide.

By Wednesday, some appeared satisfied at the level of lending, while others continued to make more cash available.

A spokesman at the Swiss National Bank in Zurich said: "As in days past, the bank continues to provide generous and flexible liquidity to the markets.'

The Bank of Japan injected an extra $28.4bn into money markets to ensure liquidity, following on the heels of the $24bn it had pumped in the previous day.

Reflecting the depth to which the financial crisis has been felt, Angela Merkel, the German chancellor, told parliament she expects the crisis to effect Europe's biggest economy and called for politicians to construct "a smart frame of order'' for financial markets.

That, she said, should include better co-operation with regulatory agencies, more overall transparency, and for rating agencies and hedge funds to act more responsibly.