Lloyds TSB is in advanced merger talks with HBOS to create a UK retail banking giant worth £30bn, the BBC has learned.
A deal would end uncertainty about the strength of Halifax-Bank of Scotland after a run on its shares.
The government has also said it will over-rule any concerns that competition authorities may raise, BBC Business Editor Robert Peston has learned.
He added the prime minister was involved in negotiating the deal, which has the blessing of UK authorities.
HBOS and Lloyds have declined to comment.
The advanced talks are being encouraged by both the Treasury and Financial Services Authority (FSA) as a deal will ease concerns about the health of the UK banking sector, our business editor added.