Spain's Santander to pay $2.5 bln for A&L

Under the terms of the deal, Santander, which acquired British bank Abbey in 2004, will offer one of its shares for every three shares in Alliance and Leicester, the Spanish bank said in a statement sent to market regulator CNMV.

"For Santander, the acquisition will deliver increased critical mass for the Santander Group in the UK market," the statement said.

"The acquisition allows the combination of A&L and Abbey's complementary business operations, enhancing the competitive positioning of the products and services offered by the group, benefiting customers," it added.

The deal values each Alliance and Leicester share at 299 pence, a premium of about 36.4 percent over the closing price on Friday of 219.25 pence.

Earlier Monday the British bank said it was in "advanced" talks with an unnamed party -- later identified by the BBC as Santander -- over the possible offer, worth the equivalent of 1.57 billion euros or $2.5 billion.

The bank statement and report caused shares in the bank to soar 45.95 percent to 320 pence in morning trade on London's second-tier FTSE 250 index.

Alliance Leicester, like many global banks, has been hampered by the US subprime home loan crisis and the subsequent worldwide squeeze on credit that began last August.

The bank's share price had tumbled lower last week to close at 219.25 pence on Friday amid mounting international unease about the health of the U.S. financial services sector.

Commercial banks have turned increasingly cautious about lending money to one another, creating a so-called credit-crunch.

Many major banking groups have suffered massive losses as a result of complex investments in the collapsed U.S. subprime housing market