Italy has more than 700 different lenders

Unipol's bid values BNL at almost 5bn euros (�3.4bn; $6bn).

BNL is the latest Italian bank to be in demand as firms seek access to an underdeveloped and fragmented industry.

But Italy stands accused of protecting local firms, to help them profit from an expected surge in consumer borrowing and market consolidation.

Many analysts said that they now expect BBVA to sweeten its original all-share bid with cash.

Trigger level

Unipol said on Monday that it had agreed to buy a 27.5% stake in BNL from key investors, adding to the 10% holding it already had.

Italian banking may look horrible now, but in five years' time it will look very different Arturo de Frias, Dresdner Kleinwort Wasserstein.

That forced Unipol to table a mandatory takeover offer, and Italy's fourth-biggest insurance firm said that it would pay 2.70 euros for the shares it did not already own.

Unipol said its offer would start in September, pending approval by the Bank of Italy. BBVA already has approval.

BBVA's offer, which runs until 22 July, valued BNL at 2.65 euros per share.

A merger between Unipol and BNL would create Italy's third largest insurer and the country's six largest bank.

Analysts said that while Unipol would be able to wring cost savings out of the firms, BBVA may be a better fit.

"BBVA's main activities are banking, not insurance, and it has been active in Italy for a long time," said Marcello Zanardo, an analyst at Keefe Bruyette & Woods.

National interest?

Italy's banking market is dominated by small and medium-sized banks, many of which are seen as inefficient and overstaffed, and is thus regarded as ripe for consolidation.

Consumer borrowing in areas such as credit cards and mortgages lags behind other European countries, and analysts are predicting a surge in borrowing.

In addition, a lack of real competition has allowed banks to keep their charges much higher than in other countries, giving lenders a healthier profit margin.

So far foreign banks have failed to break into the Italian market, and the Bank of Italy has had to defend its actions in an earlier takeover tussle that involved Dutch bank ABN Amro and its bid for Antonveneta.

It came under fire after it allowed Italian lender Banca Popolare Italiana to increase its stake in Antonveneta to nearly 30%, while delaying similar attempts by ABN.

An investigation is currently underway.