Industry sources said the boards of both companies would meet at the weekend to give final approval to a recommended cash and stock offer, worth 210 pence a share.

The deal would create a powerful new financial services group with a market value of some 30 billion pounds. It would twin the extensive branch network and 6.5 million personal account holders of NatWest, one of Britain's `big four' retail banks, with L&G's high-profile and low-cost savings products.

The planned price represents a 20-per cent premium to L&G's share price on Wednesday. Shares in the 163-year-old company surged 10 per cent on Thursday in heavy volume of 41.7 million to 192-1/4 pence on rumours that a bid was imminent.

That sharp price move ahead of the announcement prompted immediate scrutiny from stock exchangeregulators.

L&G powered still higher when talks were confirmed on Friday morning to stand 5.3 per cent ahead at 202-1/2P by 1100 GMT, placing the shares on a hefty 35 times current year earnings, according to Reuters Securities 3000 data.

L&G shares have risen from a low around 145P in mid-August.

NatWest fell 4.3 per cent to 11.59 pounds amid concerns about the dilutive effect of its proposed bid, putting them on 13.5 times expected 1999 earnings.

NatWest chief executive Derek Wanless has made no secret of his determination to move into the savings and pensions market, an area where analysts say his bank has been weak and faces increasing competition.

His bank has a market value of around 20 billion pounds.

Britain's life and pensions industry is under growing pressure to consolidate, with margins being squeezed by government plans to introduce a new type of low-fee pension, known as the stakeholder pension.

Lloyds TSB Group Plc, the country's biggest retail bank, raised the competitive stakesin June with a deal to buy mutually-owned Scottish Widows for seven billion pounds.

Norwich Union Plc jumped 8 per cent on speculation that it could be the next life assurer to be snapped up.

Legal & General, which has pioneered low-cost index-tracking savings products, will fill the savings gap for NatWest, analysts said. Its efforts to build an in-house life business, NatWest Life, have met little success.

Analysts said a price of 210P Was high but justifiable.

"The price is a fairly full one but there aren't many of these acquisitons around and it's an area that all banks based in the UK and Europe are desperate to get into," said David Poutney of WestLB Panmure.

"One cannot rule out a bid coming from elsewhere, forcing NatWest to pay up."

The deal should generate significant new revenue for NatWest as L&G products are pushed through its extensive customer base. Cost savings, however, are expected to be limited.

The combined group will also be a powerful force in fund management, bringingtogether L&G's 94 billion pounds of assets under management with the 50 billion managed by NatWest's Gartmore unit.

For NatWest, the deal is an important strategic move. The group has been slimming down its assets in recent years by selling off unprofitable units and rationalising retail operations.

But it has been relatively slow to hit the acquisition trail and its track record leaves some analysts less than impressed.

"Their history of acquisitions does have the reverse Midas touch," said Poutney of WestLB Panmure. NatWest is being advised by JP Morgan and L&G by Schroders.