Lloyds Banking Group says its new chief executive will be Santander UK's current boss, Antonio Horta-Osorio.
He will replace the current chief executive of Lloyds, Eric Daniels, who is retiring, on 1 March.
Lloyds, which is 41%-owned by the UK government, is Europe's fourth-largest bank by market value.
The Portuguese banker's replacement at Santander UK is Ana Patricia Botin, daughter of Santander's chairman, Emilio Botin.
Lloyds' share price ended the day up 2.7% at 69.2p, following the announcement by the UK bank, while in Madrid, Santander's shares fell 3.5%.
Ms Botin, who has been confirmed as the new Santander UK head, has worked for the bank since 1988, having previously worked at investment bank JP Morgan in the US.
Following Mr Horta-Osorio's departure, she is now seen as the most likely successor to Santander Group's chief executive, Alfredo Saenz.
Mr Horta-Osorio had been UK chief executive at Santander since August 2006.
He oversaw the group's recent rapid expansion in the UK as it bought Bradford & Bingley's savings business and Alliance & Leicester.
Analysts say Mr Horta-Osorio's surprise departure may complicate a possible plan of Santander to raise £3bn or more by floating part of its UK bank on the stock market next year.
The new Lloyds head accepted a salary cut in order to take up the role, according to his new employer.
His new pay packet consists of a £1.035m basic salary, and an annual bonus of up to £2.33m, according to Lloyds. He was paid an estimated £3.5m by Santander in 2009.
However, Mr Horta-Osorio will also be compensated for the loss of deferred pay and shares from Santander that he has forfeited as a result of his departure.
And from 2011, he will be eligible for a bonus of up to 420% of his basic salary - or £4.35m - paid after three years and linked to performance targets.
However, the new job gives Mr Horta-Osorio the chance to turn around what is Europe's fourth-largest bank by value.
Lloyds was bailed out by the UK government during the financial crisis, largely because of losses on mortgages extended by Halifax Bank of Scotland, which Lloyds rescued at the height of the crisis.
Mr Horta-Osorio said he was "conscious of the vitally important role the Group plays in the UK's social and economic fabric".
"Lloyds is a key player in the UK economy and is instrumental in supporting the future growth and prosperity of the country," he added.
"I am personally committed to ensuring the bank plays its part in lending to SMEs and supporting homeowners."
His appointment was welcomed by the UK government - Lloyds' main shareholder.
"It is worth noting the success that Santander has had in increasing lending to small businesses in the UK and hopefully that success is something that can be replicated by Lloyds," said a spokesman for the Prime Minister.
Earlier this week, Lloyds said it was on target to deliver a "good financial performance" for 2010 and was continuing to cut costs, having returned to profit during the first half of the year.