Suggestions that the Spanish may be making eyes at HBOS lifted its shares by nearly 17 per cent yesterday amid a rally in banking shares.

The logic was fairly simple: Santander has agreed a takeover of Alliance & Leicester, so there was a belief that BBVA, its rival, would feel the need to make a similar acquisition.

Sceptics said that the rumour was convenient for Morgan Stanley and Dresdner Kleinwort, the HBOS underwriters, which have been left with a lot of the stock to sell. HBOS rose 44p to 305p amid high volumes, although dealers said that much of the trade was from hedge funds closing short positions with little buying interest from institutions.

More good news for banks: Wachovia and Washington Mutual unveiled big losses in the United States but said that they did not need new funds. This created a sense that the worst of the credit crunch may be over for the banks and now was the time, therefore, to sell mining stocks and buy banks. Deutsche Bank added further to the more optimistic mood as Mike Mayo, its bank analyst, said that he was adopting a less negative stance on banks. He said that the problems triggered by the sub-prime mortgage crisis have not spread to other areas as much as had been feared. Barclays rose 37¼p to 352p and Royal Bank of Scotland jumped 22¼p to 221¼p. The FTSE closed up 85.8 points at 5,449.9.

Friends Provident rose 10½p to 90.6p after Goldman Sachs, which is advising it, rated it a “conviction buy” on the potential for disposals.

Ferrexpo, the Ukrainian iron ore miner, was the biggest mining victim, falling 12¼p to 263¼p. On Tuesday it said that Ukrainian cost inflation had risen 29 per cent in the first half. Iron ore prices have risen faster, but may not continue at this pace. The company’s future hangs on finding a joint-venture partner this year to bring other mines into production, but the chief executive’s sale of more than half of his stake in June did not send a confident signal and the shares have fallen 40 per cent since.

Oil stocks lost ground, too, with the falling oil price. Tullow Oil closed down 14½p at 765½p and BP was off 5¾p at 521¾p.

In the FTSE 250 housebuilders bounced back from heavy falls, with Taylor Wimpey up 6¼p at 50p and Barratt Developments ending the day up 19¼p at 110p.

Galiform, which sells kitchen units to builders through its Howden Joinery depots, fell 1¼p to 39p as first-half profits fell to £22 million. It also said that should MFI, the retailer that it sold for £1 last year to Merchant Equity Partners (MEP), “suffer financial distress”, Galiform would have to pay £21 million a year in rent and rates for 46 MFI stores, on leases lasting up to 17 more years. Last week MFI brought in Kroll Talbot Hughes, the corporate restructuring expert, as it struggles in a dire market.

Galiform also faces a claim of £53 million from MEP, due for a court hearing next year, and a shortfall in its pension fund, which has ballooned to £112 million. Jon Bell, the Shore Capital analyst, cut his rating to “sell”. New York: Stocks rose amid hopes that the US Government would approve the rescue plan for Fannie Mae and Freddie Mac, the struggling lenders, and as the price of oil fell. The Dow Jones industrial average closed up 29.90 points at 11,632.40.

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