The two lenders said in a joint statement Tuesday that Westpac was offering 1.31 of its own shares for each St. George Bank share, valuing the offer at A$18.6 billion.

The deal requires approval from competition regulators and the federal government.

The deal would create Australia's largest financial services firm in terms of market capitalization, valued at more than A$66 billion based on Friday's closing prices.

Shares of the two companies were in a trading halt pending an announcement, with buying and selling due to resume later on Tuesday.

The combined group would have some 10 million customers, a 25 per cent share of Australia's home loan market and would be the nation's biggest wealth platform provider with funds under administration of A$108 billion, Westpac said.

St George Bank's board will recommend the offer to shareholders, subject to an independent expert confirming the transaction is in their best interests, the banks' statement said.

The banks signed an agreement on Tuesday for a two-week exclusivity period, during which they will undertake due diligence and negotiate the terms of a merger agreement, the banks said.

Westpac is currently Australia's third largest bank by market capitalisation, and with the Commonwealth, ANZ and National Australia forms what is known as the country's 'big four' banks.

For years, analysts have speculated that St George - Australia's fifth largest bank by market capitalisation - could be a takeover target. The group is outside the big four banks, which are prohibited from merging with one another under competition rules.

Westpac, which announced its offer for St George on Monday, has long been considered the most likely suitor.

Treasurer Wayne Swan said on Monday the government would examine the deal but declined to comment further. -- AP