An IBJ spokesman said forming a joint holding company was one possible option. Jiji news agency, quoting unidentified sources, said the three banks will announce a deal on Friday. Several Japanese media flashed news of the triple tie-up just as Tokyo financial markets were winding down for the day. The reports jolted the summer lull at the Tokyo Stock Exchange, which halted the trading of shares in all three banks. IBJ was last traded at 984 yen, up its daily limit of 100 yen or 11.81 per cent. DKB rose 91 yen or 11.12 per cent to 909 and Fuji Bank also rose its daily limit of 100 yen or 11.72 per cent to 953.

By a simple calculation of assets, the trio would create a bankingconglomerate with more than 140 trillion yen ($1.26 trillion) in total assets, surpassing Deutsche Bank AG, currently the world's largest bank with assets of $735.2 billion.

The news is the latest in a wave of global banking mergers. In the past year, Deustche has taken over Bankers Trust Corp in the largest takeover of a US bank by a foreign firm, while in France, Banque National de Paris has been battling to create the world's first trillion-dollar bank by absorbing rivals Paribas and Societe Generale.

If the Japanese banks end up in a full merger, they will have beaten the French in the trillion dollar stakes. "If it happens, it would create a huge financial institution but with a great need to consolidate," said Brian Waterhouse, senior financial analyst at HSBC Securities. "Whether it would be a profitable institution, though, remains to be seen."

Waterhouse estimates a merged bank combining the three would have revenues of $54 billion, profits of $1.7 billion and staff of 41,000 in 772 branches inJapan and around the world. "It would create Japan's own Citicorp," Robert Zielinski, senior vice-president of equity research at Lehman Brothers, said.

Analysts say the tie-up is sorely needed at a time when Japan's battered banking sector faces stiff domestic and foreign competition under the nation's "Big Bang" financial deregulation.

The three institutions are also among 15 big banks that in March received an injection of public funds totalling over seven trillion yen to mop up their massive problem loans, a bruise within the industry that has yet to heal.

The Financial Supervisory Agency, Japan's financial watchdog which oversees the banking industry, had no immediate comment on the possible alliance deal.

Earlier, the daily Nihon Keizai Shimbun reported the banks agreed to a comprehensive tie-up that will include setting up a joint holding firm as early as autumn 2000.

The daily, quoting unnamed sources, said the three institutions would divide their banking operations into retail,corporate and investment banking sections that would eventually be integrated.

By restructuring and integrating their operations, the three banks hope to gain a competitive edge to survive heightened cmpetition following financial deregulation in Japan, it said.

DKB and Fuji Bank have already joined hands in a trust banking joint venture and had been expected to enter into a full merger sooner or later, analysts said. IBJ had also announced a partial alliance with Japan's largest brokerage, Nomura Securities.