Analysts reckon that Italy's banking market needs consolidation

The decision comes as Italy is under increased scrutiny over how it oversees consolidation in its banking sector.

Bank of Italy governor Antonio Fazio has been criticised for favouring local buyers over foreign companies.

Spanish bank BBVA also offered to buy BNL, but withdrew from the race after Unipol built up a stake in the lender.

The Bank of Italy and the insurance market regulator now have to approve the BNL deal for it to go ahead.

Time for change

Mr Fazio has come under pressure to resign following revelations about his role in another takeover battle.

The central bank's governor was taped talking to Gianpiero Fiorani, the chief executive of Banca Popolare Italiana, about a takeover battle for Banca Antonveneta.

The Bank of Italy has to change with the times Italy's Economy Minister Domenico Siniscalco

Mr Fazio approved Banca Popolare's bid, despite a rival offer from larger Dutch bank ABN Amro.

Even though he denies any wrongdoing, Mr Fazio's actions have led to calls for the central bank to be reformed.

Earlier this month the Cabinet approved plans to limit the tenure of the central bank chief to seven years - however, the plan needs Parliamentary approval and also will not affect Mr Fazio who has a job for life under the current system.

Speaking to a Parliamentary hearing on Wednesday, Economy Minister Domenico Siniscalco said that the "Bank of Italy has to change with the times".

Mr Siniscalco said that the government was mulling plans to remove the Bank of Italy as the regulator of competition in the domestic banking market.

Instead, the role may be moved to the financial markets watchdog, he said.

Mr Siniscalco added that Italy need to give clear rules about how it would approve banking mergers and takeovers, otherwise it risked alienating foreign investors.