French banks Societe Generale (SocGen)and Paribas are planning a merger which which will create Europe's third-largest bank.

The merger, in the form of a share swap by SocGen with Paribas, will push mutual Credit Agricole from its pedestal as France's number one bank.

It also represents France's first major step towards the consolidation that has gripped the financial services industry.

Shares in Paribas and Societe Generale were suspended for much of yesterday. The CMF financial markets supervisor said it would decide whether the bid was acceptable "in a few days".

If successful, the deal will create a banking group ranking third in Europe in terms of assets, behind Switzerland's newly-created UBS and Germany's Deutsche Bank.

SG Paribas said it would be the world's fourth largest bank on an equity basis, naming as its larger rivals BankAmerica, CitiGroup and HSBC.

News of the deal renewed speculation about prospects for stateowned bank Credit Lyonnais, due to be privatised this year, in return for European Commission approval of a government bailout.

Societe Generale head Mr Daniel Bouton said his bank was dropping all legal action against the bail-out. Its appeal to European Union authorities against the rescue on grounds of unfair competition had been seen as a major obstacle to Societe Generale taking a stake in Credit Lyonnais when it is sold.

Paribas chairman Mr Andre Levy-Lang said the newly merged group could potentially join Credit Lyonnais' core shareholders after its privatisation.

SocGen said it was offering five shares for every eight shares in Paribas, on condition that 50.01 per cent of shares were tendered in the offer, expected to open from February 9th.

It said the bid offered a 17 per cent premium above the Paribas share price over the past 20 trading days.

SG Paribas would have had a net profit in 1998 of €2.1 billion ($2.39 billion) and a return on equity of 11.3 per cent.

The group aims for a return on equity of 15 percent by 2000 and an annual increase in the net profit per share of at least 15 per cent over the next three years.

The SG Paribas group, to be headed by Mr Levy-Lang, aimed to play a major role in the European banking landscape, it said.

The group foresaw some one billion euros in restructuring charges to create cost savings of some €800 million per year from 2001.

The newly merged group combines Paribas's investment banking expertise and client base with Societe Generale's strong retail banking businesses.

The new SG Paribas group represents a set-back for Banque Nationale de Paris which, according to newspaper reports, has also flirted with Paribas.

Shares in BNP initially soared on Monday on speculation it would now need a foreign partner to grow, though BNP is also thought to be interested in Credit Lyonnais.

BNP shares were briefly suspended limit-up after rising the 10 percent permitted by bourse rules before falling back below opening levels to be suspended limit-down after the news that Societe Generale was lifting its action against Credit Lyonnais.