The deal for the so-called Verde package of assets - which European Commission regulators told Lloyds to sell by November 2013 - marks a victory for the Co-op, a Manchester, England-based mutual that had become preferred buyer in December before regulatory wrangles led it to briefly lose its exclusive-bidder status in April.

The purchase price is about half what the Co-op had originally expected to pay under the December deal. It is at the low end of revised expectations and equates to up to about half the assets' book value.

The mutual will pay only £350 million upfront, with £400 million deferred, depending on performance. About £1.5 billion of equity capital will transfer over to Co-op, which takes on £11 billion of risk-weighted assets through the deal.

"Today's agreement is an important step in meeting our obligations under the mandated sale of our branches," said Lloyds CEO António Horta-Osório in a statement. "In agreeing to move ahead with the Co-operative we provide greater certainty for our customers and for our shareholders. In addition to an upfront consideration, we will also get to share in the future financial performance of the combined banking business which will be an effective challenger with a strong customer focus."

Thursday's deal - tweaked to placate financial regulators nervous about a mutual best-known for its grocery stores expanding so rapidly - will give the Co-op 4.8 million banking customers, including 3.1 million with personal current accounts, leaving the mutual with close to 7% of that market, up from 1% at present. The Co-op will take on a balance sheet of £24 billion, with the previous gap between assets and liabilities eliminated over protracted discussions. The Co-op also gets the TSB and Cheltenham & Gloucester brands. Lloyds' 632 branches will leave the Co-op with 1,000 banking outlets, or about 10% of the U.K. network.

In another move to allay the Financial Services Authority's concerns, the Co-op will use a separated version of Lloyds' IT platform for the branches through a long-term service agreement with the seller.

The companies promised to work together to seal a firm deal, but gave no timeframe, other than the eventual November 2013 deadline for completion.

Lloyds shares were up 0.305 pence, or 1.%, at 30.80 pence by late morning in London. Analysts at Oriel Securities Ltd. said the deal represented a "discount for certainty," though Daniel Stewart & Co.'s Simon Willis wrote that the terms do "not look particularly attractive for shareholders."

However, he added: "The loss on disposal is expected to be broadly offset by lower capital requirements

from a reduction in risk weighted assets. "The divestment is not expected to have a material effect on Lloyds' future profitability."

The Co-op twice beat off competition from banking acquisitions vehicle NBNK Investments plc, which lost to the mutual in the original discussions before reopening talks in April and on losing again, deciding to wind down. Lloyds, advised by Citigroup Inc.'s Gilles Graham, John Sandhu and Philip Robert-Tissot, and JPMorgan Chase & Co., has also been preparing the assets for an IPO while holding talks with bidders.

The EC made Lloyds sell the branches as a condition of state aid the London institution received in January 2009 to help it digest its government-brokered rescue takeover of U.K. peer HBOS plc. Lloyds is the U.K.'s leading retail bank.

As well as FSA approval, the deal needs clearance from the Treasury and the European Commission.

Co-op CEO Peter Marks said: "Whilst we are not at the end of the road yet, we are pleased to have reached this important milestone and look forward to continuing to work with Lloyds Banking Group to reach a final agreement."

Co-op's advisers include Credit Suisse Group plc, a Barclays plc team led by Ben Davey and Linklaters LLP.