Italy's largest bank, Unicredito, has struck Europe's biggest-ever cross banking merger deal with German bank giant HypoVereinsbank.
The all-share offer for HVB and its Austrian and Polish subsidiaries is worth 19.2bn euros (£12.8bn; $23.2bn).
"We are creating the first truly European bank," said HVB chief executive Dieter Rampl.
The tie-up is likely to involve about 9,000 job cuts, mostly in Germany and Eastern Europe, HVB's unions have said.
The merger will give Unicredito a strong presence in Germany and in Eastern Europe, where bank lending is growing at a faster pace than in the 12-nation eurozone.
Analysts believe it may trigger more European banking mergers.
Job cuts
Unicredito will issue five new shares for every HVB share, valuing the German parent bank at 15.4bn euros.
Unicredito is making the same offer to shareholders of HVB's subsidiaries Bank Austria Creditanstalt and BPH in Poland, with a cash alternative.
The two banks expect the merger to result in cost savings of nearly 1bn euros a year by 2008.
Unicredito's boss Alessandro Profumo will be chief executive of the combined bank, while HVB's Mr Rampl will become chairman.
In separate interviews, Mr Profumo and HVB union representative Klaus Gruenewald have suggested about 9,000 jobs could go, about 7% of the combined banks' nearly 130,000 staff.
"There won't be cuts overnight, but rather a reduction," Mr Profumo said in an interview with La Repubblica newspaper.
Banking analysts have been anticipating consolidation among European banks since Spanish group Banco Santander Central Hispano bought a UK lender, Abbey National, for £8.5bn in 2004.
The battle for Italy's Banca Antonveneta is another sign that consolidation is indeed taking place. It has two suitors - Netherlands-based ABN Amro and Banca Popolare di Lodi. ABN Amro raised its offer on Friday.
Investors approve
Mr Profumo is due to give more details of the merger plan on to banking analysts in Milan on Monday.
Unicredito expects the merger will be have a positive effect on its earnings per share from 2007.
The response from investors has been upbeat. Shares in both banks rose more than 2% in heavy trading early on Monday.
But some warned that problems at HVB - which has written off 5.7bn euros in bad loans in the last year years - may not yet be solved.
Unicredito could "create a great bank" as the merger brings strong benefits, said Riccardo Lagorio, a fund manager at Banca Profilo. "The risk is that the situation at HVB is worse than people thought", he added.
HVB's largest shareholder, the Munich Re insurance firm, has given a broadly positive response to the merger proposal, saying it would "carefully review" the offer.
Munich Re owns 18.3% of HVB, which in turn holds 10% of the reinsurer.
"People are really positive about the deal," said one Milan-based stock trader.
German investment house WestLB upgraded its recommendation on HVB to neutral from underperform, and traders expected more upgrades could follow.
By: N. Peter Kramer
