M&G, the investment arm of the insurance group Prudential, has come out in support of Lloyds TSB's controversial £12 billion rescue takeover of HBOS.

It plans to vote in favour of the deal in respect of its Lloyds shares and HBOS shares. It owns more than 2 per cent of each.

The decision came as HBOS shares rallied again today, narrowing the discount at which they trade relative to the Lloyds offer.

HBOS's senior management are in the midst of a whistle-stop tour of insitutions to drum up support for the deal. Yesterday Standard Life, another big holder of both banks, decided to support it.

Lloyds shares were marked 7.5 per cent higher to 268.75p, valuing its all-share offer at 223.8p per HBOS share. HBOS was up 12 per cent to 166.2p, languishing at a 26 per cent discount to the offer, suggesting continuing doubts the deal will go ahead in its present form. However, the gap has narrowed from 35 per cent earlier in the week.

Sources close to M&G said the investment group was concerned that any failure of the deal could imperil not just HBOS, but also Lloyds through a contagion effect. Any attempt to sweeten the terms for Lloyds would just produce muddle.

LIke many institutions, M&G is not particularly concerned about the precise terms because it holds shares in both banks in similar quantities.

Investors holding only Lloyds may prove to be more active in demanding that Lloyds squeezes a better deal from HBOS, particularly if due diligence over the next few weeks uncovers a further deterioration in its loan book.

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