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Gordon Brown was personally fighting to save the proposed £12 billion rescue of Britain’s biggest savings bank last night amid growing doubts over the deal.

HBOS, which owns Halifax and Bank of Scotland, lost more than £1 billion of its value yesterday as shares slumped by up to 20 per cent. Traders took the view that shareholders of Lloyds TSB would block the rescue deal on its current terms.

The rising uncertainty forced the Prime Minister to take the unprecedented step of defying the markets publicly and intervening in a merger that he helped to broker.

“I am confident that the Lloyds TSB takeover of HBOS will go ahead,” he insisted. Two weeks ago he played a key role in the proposed takeover by waiving competition rules.

Lloyds is offering 0.833 shares for every HBOS share, which values the bank at 188p. The stock market is now valuing HBOS at about 35 per cent less than this. “The market is telling you the deal will just not go ahead in its current form,” one leading investor in both banks told The Times.

If the takeover were to unravel it would be an acute embarrassment for Mr Brown and could also throw the solidity of HBOS, which has 20 million depositors, into fresh doubt.

On Wall Street and in the City of London share prices rallied strongly on hopes that the US Congress would pass a modified version of the bailout plan that was vetoed on Monday.

The FTSE closed 83 points up, or 1.7 per cent, while the Dow climbed 485 points, or 4.7 per cent. But the paralysis in the wholesale money markets — which ultimately determine the supply and prices of mortgages and loans to people and businesses — worsened. The cost to banks of borrowing US dollars for one day almost tripled to its highest level for seven years. Central banks continued to pump hundreds of billions of dollars of liquidity into the markets to help cash-hungry banks.

In Washington, a frantic effort was under way to find 12 congressmen prepared to switch their vote after the House of Representatives rejected President Bush’s $700 billion plan on Monday, which triggered Wall Street’s the worst single day points fall.

Mr Bush made his second appeal to rebels in 24 hours, saying that the consequences of failing to act were growing by the day. Millions of Americans were facing the real prospect of economic hardship, he said. The Senate will vote on the proposals today.

Mr Brown said that the US had a duty to fix the financial crisis afflicting the world and that the problem had to be resolved in America. He said that he was confident that reason would prevail in Washington.

Regulators are determined that the HBOS-Lloyds deal should stand in its current form. The deal needs a 75 per cent approval from shareholders, who are growing increasingly sceptical. The vote is still two months away. Lloyds insisted that it would not try to renegotiate the deal. However, if its shareholders were to show serious signs of rebelling the board would have no choice but to walk away or demand sweeter terms from HBOS.

British bankers are putting increasing pressure on ministers and regulators for help. Some are pressing for a relaxation of the rules of the Bank of England’s Special Liquidity Scheme, under which they can swap hard to trade assets for highly desirable government bonds. Others would like to see a government guarantee of all UK deposits, especially after the Dublin Government’s decision to guarantee all deposits in Irish-owned banks.

Mr Brown said that the Government would raise the guarantee for bank savings to £50,000 from £35,000 but would not match Ireland’s offer.

Lloyds and HBOS are lobbying their shareholders hard, arguing that the benefits of the deal to both sides are colossal because of the stranglehold the combined group would have in the personal banking market with the normal anti-monopoly rules being waived. That should outweigh any niggles over the precise terms.

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