MADRID (Reuters) - Spanish lender Sabadell (>> Banco de Sabadell SA) is set to make a firm offer to buy TSB (>> TSB Banking Group PLC) on Friday, a source with knowledge of the matter said, after it made a 340 pence-per-share preliminary approach for the British bank last week.

"Both banks are expected to announce the deal tomorrow along the terms already announced last Thursday," the source said.

TSB, which is 50 percent owned by Lloyds (>> Lloyds Banking Group PLC), had already said it would recommend the offer to shareholders.

The respective boards of TSB and Sabadell met Thursday and approved the deal, the source added. Sabadell declined to comment and TSB could not immediately be reached for comment.

(Reporting by Jesus Aguado, Additional reporting by Steve Slater in London, Writing by Sarah White, Editing by Cynthia Osterman)