HBOS shares rose more than 11 percent amid a general rally in banks and on market talk of bid interest from Spanish rival BBVA.

Santander has agreed a takeover of Alliance & Leicester so there is a belief that its Spanish rival will feel the need to make a similar acquisition. But sceptics said the rumour was convenient for HBOS underwriters Morgan Stanley and Dresdner Kleinwort, which have been left with a lot of HBOS stock to sell in the market.

There was also a feeling that, with Wachovia unveiling big write-offs in the US but saying it did not need new funds, the worst of the credit crunch for the banks may be over.

While HBOS was up at 291.75p, comfortably above its rights price, Royal Bank of Scotland jumped 7.4 per cent to 213.75p and Barclays gained 6 per cent to 335p.

One trader said: "There is a wall of fund money looking to come into banks and out of commodity stocks when the time seems right and no one wants to miss the bottom."

Deutsche Bank added to the more optimistic mood as its bank analyst Mike Mayo said he was adopting a less negative stance on banks. He said the problems triggered by the sub-prime mortgage crisis have not spread as much as feared to other areas.

But mining and oil stocks were relatively flat after recent sells offs and as the oil price declined.

Housebuilders also bounced from heavy falls yesterday, with Taylor Wimpey up 9.7 per cent and Barratt Developments gaining 6.3 per cent.

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