LONDON (AFP) - HBOS, Britain's biggest mortgage lender, revealed Wednesday it is in advanced talks that could lead to a takeover offer by its rival Lloyds TSB, after its shares plummeted for a third day running.

The move would create a British retail banking giant while curbing speculation about the financial strength of HBOS, whose shares were down 19.2 percent at the close of trading Wednesday.

The BBC reported HBOS would be sold for about 15 billion pounds (19 billion euros, 27 billion dollars), with an announcement expected Thursday, against the backdrop of the dramatic collapse of Lehman Brothers.

Reports suggested the British government would waive competition rules to allow the deal to go through.

"In the light of market speculation, the board of HBOS plc confirms that it is in advanced talks with Lloyds TSB Group plc which may or may not lead to an offer being made for HBOS," HBOS said in a statement.

The uncertainty over HBOS -- the parent company of Bank of Scotland and the Halifax bank -- follows the bankruptcy of US investment bank Lehman Brothers which continues to send shockwaves through financial markets.

Heavy losses earlier on Wednesday prompted the Financial Services Authority (FSA) to issue a statement saying that the group was well-funded, in an attempt to avoid a flood of savers trying to withdraw their money.

Prior to the reports of the takeover talks, HBOS shares had nosedived 52 percent to a low of 88 pence, as investors fretted over the state of the global banking sector despite news of a rescue for troubled US insurer AIG.

The takeover report helped push the bank's stock back into the black, at one point rising to 220 pence.

But at the close of trading, HBOS was down 19.2 percent at 147.1 pence, its third successive day of heavy losses. Lloyds TSB shares were unchanged at 279.75 pence.

The FSA said in a brief statement: "Since the beginning of the current extreme difficulties in the financial markets, the Financial Services Authority has worked intensively with all major UK banks to ensure they have credible capital and liquidity plans.

"We are satisfied that HBOS is a well-capitalised bank that continues to fund its business in a satisfactory way."

Chancellor of the Exchequer Alistair Darling said the government was keeping "closely in touch" with the HBOS-Lloyds TSB negotiations.

"They've got to decide what's best for the two banks concerned. Of course we are keeping very closely in touch, as are the regulators and the Bank of England," he told the BBC.

"But my job is to make sure that we do everything possible at this time... that we help homeowners, we help savers by maintaining the stability of the banking system."

The value of shares in HBOS -- created by the merger of Bank of Scotland and Halifax in 2001 -- had slumped by a total of 36 percent over the course of Monday and Tuesday.

But the lender argued this week that it is robust and able to fund itself.

It has 258 billion pounds of savings and the strongest capital ratio, the most common measure of bank strength, of its domestic rivals.

London's FTSE 100 index saw a turbulent day of trading, closing down 2.25 percent at 4,912.40 points

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