HBOS shares have gained as much as 17% after it emerged that management bought £6m worth of shares in the bank.
HBOS shares gained the most in one day since listing in 2001
The rise was the biggest one-day gain since the UK's biggest mortgage lender listed in 2001 as traders saw the move as a vote of confidence in the bank.
Last week, its shares plunged by a similar amount after "malicious rumours" it was in financial trouble.
Other UK banks, including Barclays, also rose, lifted by the improved offer for troubled US bank Bear Stearns.
Royal Bank of Scotland closed up 9.3%, Barclays rose 7%,and Lloyds TSB gained 6.3%.
After its early peak, HBOS ended up 15% at 544.50 pence.
On Tuesday, stock markets in the UK began their first day of trading after the four-day Easter break, while US stock markets were open on Monday.
"Today is all about Bear Stearns", said Martin Slaney at GFT Global Markets.
On Monday, JP Morgan Chase raised its offer for Bear Stearns to $10 (£5) a share from $2 a share in the hope that the improved terms would satisfy shareholders angry at the lower offer.
The Federal Reserve engineered rescue of one of Wall Street's biggest banks came after it ran into trouble because of its sub-prime US mortgage debt and other banks refused to lend to it.
This caused panic in stock markets worldwide as investors considered which other banks may be next to fall.
Last Wednesday, shares in HBOS, which owns the Halifax and Bank of Scotland, dived as the UK stock market opened for trading.
Shares fell as low as 17% at one point amid speculation that it had approached the Bank of England for emergency funds.
HBOS denied the rumours, calling them ill-founded and malicious.
The UK's financial watchdog, the FSA, is investigating whether the rumours had been deliberately spread to undermine the value of bank shares.
The ebullient mood in the financial sector helped to boost the UK benchmark FTSE 100 stock index.
The FTSE 100 ended up 193.9 points, or 3.5%, at 5,689.1.