Shares in Alliance & Leicester jumped 50 per cent on Monday on news of an agreed 317p a share, all-share takeover offer from Santander of Spain.

A&L said earlier it was in advanced discussions regarding a possible offer priced at 299p a share combined with the right to receive an interim dividend of 18p a share, bringing the total potential offer to 317p a share. This puts a price tag of £1.33bn on the bank.

Santander, which late last year abandoned initial discussions with A&L over price, is offering one share for three A&L shares. It said its offer represented a 36.4 per cent premium to A&L's closing share price on Friday.

The Spanish bank will issue 140m new shares to pay for the deal, which is structured as a scheme of arrangement and conditional on getting approval from 75 per cent of A&L shareholders.

A&L shares were 109.5p higher at 328.75p in late London trading, suggesting that investors are holding out hopes that a counter-bidder may emerge. Shares in Santander were 0.9 per cent higher at €11.33 in Madrid.

Santander plans to combine A&L with Abbey, the fourth largest bank in the UK, which it acquired in 2004. It said the deal would give the combined business 959 branches, representing a 7.6 per cent share of the UK market, and would give it a combined market share of more than 8 per cent in UK savings and unsecured personal loans.

In addition, Santander said it intended to to reduce the assets of the combined A&L and Abbey by between £20bn and £30bn over two years. The Spanish bank added that it "believes that it is consistent with its existing policies to assume that it will need to provide additional capital of £1bn to A&L."

A deal with A&L would further Santander's ambitions to grow its branch network in the country, while also providing a platform to make a push into business banking, which Santander has identified as a new revenue stream.

Only last week A&L named a new chairman, appointing Alan Gillespie to the role left vacant by the death of Sir Derek Higgs in April. Mr Gillespie will take up his new role on September 8.

The appointment of Mr Gillespie was widely regarded as a move to help stabilise the bank amid fears that it could face further pain from the credit crunch.

Emilio BotÌn, Santander chairman, said in a statement: "The acquisition of A&L will be a significant step in the development of Santander's UK business. The transaction meets Santander's return on investment target as well as being accretive for Santander shareholders. We are very pleased to be working with the management and employees of A&L as we seek to build with Abbey one of the leading franchises in the UK banking sector."

Roy Brown, acting chairman of A&L pending the arrival in September of Mr Gillespie, said: "A&L is a strong and attractive business and its resilient performance is proof of the quality of its franchise. However, the board is acutely aware of the significant external risks presented by the deterioration in economic conditions and the continuing turbulence in the financial markets. Against that background, the proposal from Santander represents value for shareholders and the combination of A&L with Santander's UK operations is an excellent fit."

A&L has taken a pummelling from the credit crunch. Its shares have lost more than half their value since the beginning of the year.

Santander is advised by Merrill Lynch, while A&L has hired JPMorgan Cazenove, Morgan Stanley and Rothschild.