Italian banks have been protected from foreign takeovers

The all-share deal, if it goes ahead, would be the first ever foreign takeover of an Italian bank.

The government and the Bank of Italy are keen to keep Italy's banks in domestic hands, despite pressure from the European Commission.

The Netherlands' ABN-Amro is also eyeing an Italian deal.

It has indicated it could bid for Banca Antonveneta, Italy's ninth-biggest lender. BNL holds the number six spot.

Market to decide

The Bank of Italy has already told ABN that its bid is in line with Italy's takeover regulations.

But suspicion remains that Bank of Italy governor Antonio Fazio will try to stall the deals by encouraging the creation of a consortium of domestic investors.

Ministers have expressed public disdain for the idea of foreigners - even fellow members of the European Union - owning major Italian banks.

The European Union's Single Market Commissioner, Charlie McCreevy, has written to the Bank of Italy's Mr Fazio warning that any attempt to block the merger would not be tolerated.

"The market will decide" on banking mergers, his spokesman said.

Savings

For BBVA, the deal would make strategic sense, analysts said.

"It's a good move on their part," said Bruno Duarte of investment bank Fox-Pitt.

"BBVA has shown that it's a very good retail banker and has shown in Spain with its efficiency drive what it can accomplish in Italy."

BBVA's main rival at home, Banco Santander Central Hispano, sealed its own position as Spanish number one with the �9bn ($16.9bn) purchase of the UK's Abbey in late 2004.

BBVA wants to close the gap with rival BSCH

He believed the takeover would succeed despite Italian concerns - but thought the size of the bid was far from a done deal.

"It's just a question of what it will cost (BBVA) in the end," he said.

The bank has already promised to buy back 3.5% of its own shares before the end of September to sweeten its offer.

BBVA's shares in Madrid were unchanged at 12.53 euros by lunchtime on Tuesday, after earlier dipping 1.2%.