HVB has a strong presence in Eastern Europe

Italy's Unicredito planned to combine two Polish banks as part of a 20bn-euro (�11.5bn) takeover of Germany's HVB.

But the European Commission is arguing that Poland broke EU competition and free market rules by refusing to clear the Polish aspect of the 2005 deal.

Poland has two months to reply to the charges and if it fails to satisfy the EU, it could lead to a court case.

The Polish aspect of the merger involves Pekao, owned by UniCredit since 1999, and BPH, the Polish affiliate of HVB.

Poland fears that if Pekao and BPH are merged, it will stifle competition within the banking industry as well as lead to job losses.

Protectionist fears

The EU says that Poland, which joined the EU in May 2004, broke rules that allow companies to do business anywhere in the 25-nation bloc when it refused to accept the takeover of BPH by Unicredito.

Poland argues that when Unicredito acquired Pekao in 1999, it promised it would not buy any other banks.

But Brussels says that holding Unicredito to this pledge "may violate EC treaty rules on the free movement of capital", even though it was before Poland joined the EU.

The European Commission is fearful that Poland's stance marks a growing trend of protectionism from states trying to block cross-border mergers, notably in the banking and utilities industries.

"I am determined to ensure that member states do not stand in the way of mergers falling within the Commission's exclusive competence," EU Competition Commissioner Neelie Kroes said in a statement.

"Otherwise, the European Union's single market will descend into chaos," Kroes added.

The case, the first of its kind from a new EU nation, is seen as a test case regarding how most recent EU states are affected by EU rules.