Banque Populaire and Caisse d'Epargne are mutual banks, partly owned by their depositors, and already jointly control the investment bank Natixis, whose shares have been ravaged during the credit crunch.

The banks have been discussing a possible merger for two years, but have been forced into action by the global financial meltdown, which experts believe will lead to a major shake-up in the European banking sector.

Their plans were therefore given a push when their French rival BNP Paribas swooped to take control of the ailing finance group Fortis's operations in Belgium and Luxembourg, strengthening its position at home.

The governing bodies of the two banks are to meet separately Wednesday and, once they get the go ahead from the governor of the Bank of France Christian Noyer, announce their merger later in the day, company officials said.

Sources from both banks said their central organisations would merge, while maintaining separately branded retail banking networks around France.

The Caisse d'Epargne is a popular fixture on the French high street, with 27 million private account holders, mostly small-scale depositors seeking a safe place for family savings and retirement nest eggs.

Last week, when the shockwaves of the Wall Street financial implosion began battering Europe, a report in the satirical weekly Le Canard Enchaine raised alarm over an alleged black hole in the bank's accounts.

Caisse d'Epargne's management hit back forcefully, denying that there was any problem and insisting that in reality the crisis had encouraged thousands more savers to switch to its accounts from riskier investments elsewhere.

Group chairman Nicolas Merindol said the bank's ratio of debt to deposits is one of the safest in Europe and boasted that since the start of the year it had opened 760,000 new savings accounts holding six billion euros (S$11.9 billion).

The banks are not listed on the Paris stock exchange, but their Natixis subsidiary has seen its price collapse by 70 per cent this year, triggering an investigation into alleged illegal selling of its shares.

On Wednesday, the banks announced that they had increased their respective stakes in Natixis from 34.5 per cent to 35.25 per cent each.

The Banque Populaire has 8.2 million clients in France. The merged group would be one of the three biggest in France, along with Credit Agricole/LCL and BNP Paribas. -- AFP