However, institutions said they would want evidence that a merger between the groups would yield significant cost-savings before giving wholehearted support to the idea.
Shares in both companies surged in early trading, adding more than a pounds 1bn to their value at one stage. However, neither side would comment on the reports and the shares fell back, leaving Halifax down 2p on the day at 845p. Pru shares still showed a gain at 829p, up 7p.
Andy Carter at Gartmore - which like most investors has stakes in both the Halifax and the Pru - said: "Prudential has not been shy in making out it would like to acquire. The building society sector is ripe for consolidation. There is immense logic in the two getting together."
Neil Woodford, a fund manager at Perpetual, with 0.75 per cent of Prudential's shares, said: "It makes a lot of sense for the two to get together. In general, it is right that there should be consolidation within the financial services sector."
Alan Richards, a director at ARC Asset Management, backed a merger but felt that before a deal could go ahead, the Pru would need government approval to take control of around pounds 3bn of orphan assets from its life fund.
These are assets not required to meet liabilities to policyholders, which the company would like to reallocate to boost shareholders funds. "My view is that this should be taken into account in the merger talks and in any subsequent share exchange. But if a deal were reached it would make eminent sense," said Mr Richards.
Of the large City institutions, Schroders is believed to be in favour, but did not comment yesterday. Several shareholders said they would prefer a tie-up between Halifax and either Barclays or National Westminster banks, where there is more obvious scope to cut costs through branch closures.
Andrew Hartley at Scottish Equitable was sceptical about the cross-selling argument underpinning a merger. "What sounds like a good strategic story is not so good when you get out into the branches," he said.
Ian Watt at Edinburgh Fund Managers said: "I can't see much benefit. It would be powerful, but hard to manage. That is not to say it won't happen."
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