Spain's Santander is buying British bank Alliance & Leicester for 1.3 billion pounds in an agreed deal that will bulk up its existing UK bank Abbey.

Santander, Europe's second-biggest bank after HSBC, has long been considered a potential buyer of A&L, but has been able to secure a knockdown price after a collapse in its target's share price in the past year.

Santander said it was offering 1 of its shares for every three A&L shares, plus a cash dividend of 18 pence per share. The deal values A&L stock at 317p, compared with a 12-month high of 1,170 pence.

A&L shares soared 54 percent to 338 pence by 11 a.m. after Santander confirmed the deal, reflecting the prospect that a takeover battle could ensue.

Santander shares were down 0.2 percent at 11.20 euros.

Santander held talks with A&L late last year, sources have said, and analysts said it has the financial firepower to do a deal when many rivals are struggling with the credit crunch.

"It would make perfect sense. If we believe all the reports, before they were looking to buy at above 6 pounds," said Simon Maughan, analyst at MF Global. He said Santander could use a deal to drive through economies of scale to boost profitability at Abbey, which is low relative to its other operations.

"Even with the cost savings they are planning to drive through at Abbey in the next two to three years, their returns will still be materially less than they make in Europe and a fraction of what they make in South America," he said.

"The merger of A&L with Abbey . will increase the group's critical mass in the British market," Santander said in a statement, adding that the merged group would have 959 offices and over 8 percent of the British savings and personal loan market.

British rival Lloyds TSB and France's Credit Agricole were also seen as possible predators. Both declined to comment on whether they would be interested.

Entrepreneur Clive Cowdery could also be interested after his attempt to buy a stake in lender Bradford & Bingley last month was rejected, though Cowdery's strategy appears to be to buy stakes and inject capital rather than full takeovers. He could not immediately be reached for comment.

B&B shares jumped 14 percent as the move on A&L stoked the prospect of broader consolidation among UK banks after hefty falls in share prices across the sector.

A&L shares had slumped over 75 percent in the past year, hit by falling profits, higher funding costs and low growth prospects.

Its profits fell 30 percent last year to 399 million pounds and are expected to more than halve again this year to 195 million, based on a Reuters Estimates average of 15 forecasts.

Unlike several domestic rivals, A&L hasn't had to raise funds from shareholders and said its capital position was in good shape. But sharply higher funding costs and losses on risky assets have hit earnings, and revenue will be held back as it reduces the amount of mortgage lending it is willing to do.

Abbey has benefited from other UK lenders scaling back, as the financial backing of Santander has seen it take a far greater lending market share than usual, analysts estimate.