MADRID, Spain (AP) - Spanish banking giant Banco Santander said yesterday it has agreed to buy the British mortgage lender Alliance & Leicester plc. in a deal valued at $2.5 billion.

Banco Santander, which also owns Britain's Abbey National Bank, said that under the terms of the proposed takeover, Alliance & Leicester shareholders would receive one share in Santander for every three shares they hold in the British lender.

Roy Brown, acting chairman of Alliance & Leicester, said the "proposal from Santander represents value for shareholders and the combination of A&L with Santander's UK operations is an excellent fit".

Alliance & Leicester is one of several British banks which have been badly bruised by tightening credit market following the collapse of the US sub-prime mortgage market. Banks' unwillingness to part with loans as house prices fall have cut into revenue and depressed share prices.

Shares of Alliance & Leicester fell steeply in February after it cut its forecast for full-year 2008 earnings.

Santander said the deal values Alliance & Leicester shares at 299 pence ($5.95). It said this represents a 36.4 percent premium based on Friday's closing price.

Alliance & Leicester shares surged more than 45 percent to 319.5 pence ($6.36) per share in morning trading before the deal was announced. Other banking stocks also rose.

Santander - the largest bank in the euro zone by market capitalisation - is racking up revenue thanks in part to booming business in Latin America.

The Spanish bank is also hunting for acquisitions abroad. Earlier this year it purchased 20 percent of Philadelphia-based Sovereign Bancorp Inc. It made its eight billion pound deal for Abbey National in 2004.

Santander chairman Emilio Botin said yesterday the acquisition of Alliance & Leicester "will be a significant step in the development of Santander's UK business. The transaction meets Santander's return on investment target as well as being accretive for Santander Shareholders. We are very pleased to be working with the management and employees of A&L as we seek to build with Abbey one of the leading franchises in the UK banking sector."

Alliance & Leicester's Mr. Brown said the lender is a "strong and attractive" business.

"However, the board is acutely aware of the significant external risks presented by the deterioration in economic conditions and the continuing turbulence in the financial markets," he said.

British Prime Minister Gordon Brown refused to comment directly on Santander's bid at a news conference yesterday, but said he welcomed foreign investment.

"We've always operated an open economy, and I think we've benefited form the fact that there is a diversity of ownership in the British economy," Mr. Brown said.

"We benefit from having an open economy."