By Steve Slater and Andrew Hay

LONDON/MADRID (Reuters) - Spanish bank Santander is buying Alliance & Leicester for 1.3 billion pounds to provide "critical mass" to its existing bank Abbey, but its target was slammed for selling out cheaply.

Santander, Europe's second-biggest bank after HSBC and long considered a potential buyer of A&L, has been able to secure a knockdown price after a collapse in A&L's share price in the past year.

Santander said it was offering one of its shares for every three A&L shares, plus a cash dividend of 18 pence per share. The deal values A&L stock at 317p, well down from over 1,000p a year ago but a 45 percent premium to Friday's closing price.

A&L shares soared 49 percent to 326 pence by 3:45 p.m., having earlier hit 338.75p. Analysts said pressure on capital was likely to deter a counterbid and A&L said it had only received one offer, but some investors expected another bidder to surface.

"They are acquiring Alliance & Leicester on giveaway terms," said David Cumming, head of UK equities at Standard Life Investments, which has a 2.4 percent A&L stake. "I would be amazed if no one else counters with a higher offer in the next few months," he added.

Santander shares were up 0.4 percent at 11.27 euros (8.9 pounds).

Santander will inject 1 billion pounds of capital into A&L to shield it against more writedowns, bad debts and difficult conditions, and plans to shrink the assets of the combined A&L and Abbey by 20 billion-30 billion pounds over two years.

It expects to reap annual cost savings of 180 million pounds by 2011 and will put A&L on its Partenon IT platform.