Tax issues and an investigation into alleged insider trading are holding up long-running merger talks between Lehman Brothers, the US investment bank, and GLG, one of Europe's largest hedge funds, according to sources close to the negotiations.

Many observers expected a deal, under which Lehman bought the 80 per cent of London-based GLG it does not own, to be announced late last year. But the talks foundered over valuation and the tax treatment of the massive gains accruing to GLG's partners - Noam Gottesman, Pierre Lagrange and Philippe Jabre.