Shares in Lloyds Abbey Life rocketed on the take-over speculation, peaking at 607 pence before falling back slightly to 595 pence, up 34.5 pence.
Lloyds TSB already holds a 62 percent stake in the life insurer and after the merger between Lloyds and TSB last December, Lloyds Abbey Life has said it is discussing a range of options which may mean restructuring.
Insurance analysts said the life insurer was considering a range of strategic options, ranging from doing nothing to closing down altogether, under a steering group run by its chief executive Stephen Maran.
Maran, and other officials at Lloyds Abbey Life, were not immediately available for comment.
But, at the time of Lloyds Abbey Life's interim results in July, finance director Laurel Powers-Freeling said the talks had not been concluded. "There is a range of options, there are a number of permutations," Powers-Freeling said then.
"We're waiting for an announcement," one analyst said. ABN Amro Hoare Govett analyst John Russell said he thought Lloyds Abbey Life was an unlikely bid target for Prudential.
"Prudential is more likely to demutualise a mutual and get access to IFAs," said Russell. "I give very little credence to a bid by the Pru," he said.
More likely is that Lloyds will pick up the remaining stake or do a deal with the minority holders to give back Abbey Life and personal loans finance arm Bowmaker. "They may unravel it...and give Abbey Life back to the minority shareholders," said Russell.
