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John Hutton, Secretary of State for Business, confirmed that the Government would be intervening to approve the takeover in the national interest. In other circumstances, a combination of two of Britain's biggest banks would have been thrown out on competition grounds.

The Government will have to use section 42 of the 2002 Enterprise Act to extend the grounds for its intervention on issues of public interest. The Department for Business, Enterprise and Regulatory Reform said Mr Hutton would table an order in Parliament when it returns after the summer recess.

Alistair Darling, the Chancellor, conceded this morning that the Government had played a role in the deal.

“We have said we would do everything we possibly can. It was clear — and HBOS knew it — that they were going to have to do a deal, so of course we helped," Mr Darling told the BBC.

"This is a landmark day for the British financial services industry. If you think about the company, it really puts us on the global scale," Mr Daniels said.

Mr Daniels denied that Lloyds TSB had been pressurised into the merger by the British Government. He revealed that talks between the two banks dated back to 2001 but had taken place in earnest in recent weeks.

"There shouldn’t be any impression this is a shotgun marriage or a forced marriage, this is something that’s been looked at for a good long while," Mr Daniels said.

Lloyds TSB provided a boost to staff in Scotland, where HBOS is one of the biggest employers, as it committed to keep the bank's headquarters at the Mound in Edinburgh, the country's financial centre.

The Financial Services Authority (FSA), the chief City regulator, welcomed the merger and said it would boost market stability and improve customer confidence. The regulator was forced to intervene in support of HBOS after persistent attacks on its share price this week.

The deal to rescue HBOS was hammered out over 48 hours after the bank, Britain's largest mortgage lender, saw its shares plunge over three days, beginning on Monday when Lehman Brothers, America’s fourth largest investment bank, filed for bankruptcy.

Investors were fearful that Lehman's collapse would panic banks and stop them lending money to each other in the wholesale money market, which is what caused the near failure of Northern Rock a year ago.

Since Monday, HBOS's shares have fallen by as much as 65 per cent and yesterday the FSA was forced to issue a statement on the strength of HBOS' business to stop a collapse in its stock.

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