However neither Prudential or Halifax would comment on the merger speculation.

Shares in both groups initially soared following a report in the Independent newspaper which suggested Prudential was lining up a £36bn deal merger with Halifax in a bid to dominate the life, pensions and mortgages market.

However they fell back in later trading.

Can shareholders bank on a deal?

Halifax's shares closed down 2p at 845p, while Prudential's shares closed up 7p to 829p.

Together Halifax and Prudential would have 45,000 staff and a merger would create one of the largest financial services groups in the country, rivaling such industry heavyweights as Lloyds TSB.

Prudential's earlier approaches to Halifax are thought to have been rebuffed.

However Mike Blackburn, Halifax's chief executive, is stepping down from his post in January which could facilitate a merger.

The devil's in the detail

Analysts believe that Prudential and Halifax have probably held discussions about joining forces and that a merger would be an attractive proposition for both companies.

But whether they will be able to thrash out a deal is another matter.

Martin Cross, banking analyst at Teather and Greenwood, said: "I am always a bit sceptical when two giants start to tango. The devil is always in the detail in these big mergers. While it may be the right deal for the corporate planners, it won't necessarily be beneficial for shareholders."

Halifax is already attempting to complete its £750m ($1.2bn) acquisition of Birmingham Midshires Building Society.

The financial services industry has consolidated rapidly over the past twelve months as company's in the US and Continental Europe have joined forces in a series of huge deals.

However not all of the mergers have been successful and recently cracks have begun to appear in the deal between US banking and credit card giant Citicorp and insurance and securities firm Travelers.