Alliance & Leicester is to be bought by Spanish bank Santander for £1.2 billion.
Earlier today, the former building society confirmed it was in talks regarding a takeover that valued the business at 317p a share.
However, it has now confirmed that it has agreed a deal with Santander – which already owns Abbey – that will see its shareholders receive one Santander share for every three Alliance & Leicester shares held.
Alliance & Leicester's share value soared after the deal was confirmed.
Once the acquisition is complete, it is likely that Alliance & Leicester will be merged with Abbey to create a larger, stronger bank and mortgage lender.
In a statement to the London Stock Exchange, Alliance & Leicester notes a merger would allow the combination of the two firms’ “complementary business operations, enhancing the competitive positioning of the products and services offered by the group, benefiting customers”.
It also claims the combined group could benefit from increased efficiency and should reduce the cost of funding for Alliance & Leicester.
Roy Brown, acting chairman of Alliance & Leicester, says the move was prompted by the ongoing credit crunch, and its impact on the economy and the banking sector in general.
"Against that background, the proposal from Santander represents value for shareholders and the combination of Alliance & Leicester with Santander's UK operations is an excellent fit," he adds.
Santander bought Abbey two years ago in 2006. Around the same time, Alliance & Leicester rejected a takeover bid from France's Crédit Agricole for £13 per share.
Meanwhile, over the pond, the US government has announced measures to help support its two largest mortgage lenders, Freddie Mac and Fannie Mae.
The two lenders, which together issue nearly half of all American mortgages, saw their share prices fall last week amid new fears about their financial stability.
In response, the US government says it will help the pair gain access to funding and may potentially buy shares if the companies. In addition, the Federal Reserve has promised to issue loans to Freddie Mac and Fannie Mae if required.