Shares in HBOS surged for a second day running after a big investor came out in favour of the proposed takeover by Lloyds TSB on the terms on offer and it emerged that Standard Life had bought a chunk of shares in the bank.

Shares in HBOS surged for a second day running after a big investor came out in favour of the proposed takeover by Lloyds TSB on the terms on offer and it emerged that Standard Life had bought a chunk of shares in the bank.

With prominent City figures also adding their support to the bid, the day's developments will probably increase confidence in the controversial takeover proceeding in line with the terms on the table.

The latest advance helped narrow what had been a yawning gap between the price implied by Lloyds TSB's offer for HBOS and the value placed on its shares by the market, which opened up early this week.

However, shares in HBOS continued to trade at a hefty discount to the offer price at yesterday's close, possibly signalling continuing doubts among investors about whether a deal will be completed as it stands.

On a day when banking shares largely gave up early gains made in early trading following the decision of the US Senate to approve plans for a $700bn package designed to ease strains in credit markets, HBOS was the biggest gainer and shares in the bank closed up 15%.

Sentiment towards the bank was boosted when M&G, the giant fund manager which has a 2.5% stake in HBOS, confirmed it backed the take-over. In an e-mail statement, the company said: "We support the deal on the terms as announced."

As M&G also has a 2% stake in Lloyds TSB, the move was significant.

It came a day after sources familiar with Standard Life's views told The Herald that the company was supportive of the Lloyds TSB takeover on the current terms. Standard Life also has a 1.5% stake in Lloyds TSB and will have some influence in deciding the outcome of the bid.

Reports regarding Standard Life's view helped propel HBOS shares up by 21% on Wednesday. Yesterday it emerged that Standard Life had bought 3.2 million shares in HBOS on Wednesday at prices between 131.99p and 154.3p.

HBOS was also helped by the fact that one of the UK's best known fund managers said he supported the proposed takeover.

Anthony Bolton, president of investments at Fidelity International and one of Britain's top performing fund managers for two decades, told BBC radio: "My personal view on this is that it will succeed and it will go through on the original terms, and I think most parties would like it to succeed on that basis."

A spokeswoman for Fidelity said the comments were Bolton's personal views and declined to comment on whether the investment firm is supporting the deal.

In a note, Mike Trippit, analyst at brokerage Oriel Securities, wrote that the waiver from competition regulations that Lloyds TSB had been granted by ministers to facilitate the deal was "such a gift" that its management would likely see the original terms as a price worth paying.

"On a two-year view the deal is incredibly attractive for Lloyds TSB, with dominant market shares and achievable synergies way above current management guidance."

Trippit noted 27 of Lloyds TSB's top 50 shareholders also owned HBOS shares and said these should vote in favour on the current terms.

Shares in Lloyds TSB closed up 4.8%, or 12p, at 262p. HBOS stock closed up 22p at 170.1p.

As Lloyds TSB is proposing to pay 0.833 of a share for each one in HBOS, the offer valued each HBOS share at 219.079p yesterday. That left HBOS shares trading at a 19% discount to the offer price, and compared with a discount of 29% on Wednesday and 35% on Tuesday, when some observers said the discount suggested Lloyds TSB might try to renegotiate its offer.

HBOS relies heavily on funding raised in wholesale markets, which have been subject to huge upheaval in recent weeks.

The company declined to comment on reports that it was in talks about the possible sale of its BankWest operation in Australia to Commonwealth Bank of Australia.

While reports have estimated BankWest to be worth £2bn to £3bn, analysts at Deutsche Bank recently described it as a "cash and capital-hungry operation".

The Bank of Scotland (Ireland) operation confirmed it had applied to be included in the Irish Government's scheme to guarantee all bank deposits.