The threesome would become Japan's second-largest bank with combined assets of 103.7 trillion yen ($975.4 billion). Tokai and Asahi previously announced they will establish a joint holding company this October.

Analysts said the addition of Sanwa, which the reports said could join them as early as April next year, would be a good match because all three were focusing on retail banking but with complementary geographical bases. Sanwa is based in Osaka, western Japan, Tokai in Nagoya, central Japan and Asahi in Tokyo.

"It would be a strategic fit," said Nozomu Kunishige, asenior analyst at Lehman Brothers.

Local media reported the three banks are expected to reach an agreement and formally announce the merger within thisweek.

On Monday, Tokai and Asahi said they are considering the possibility of other financial firms joining their merger. Sanwa Bank said nothing had been decided.

Japan's banking sector is rapidly consolidating, creating mammoth banks.The three-way merger in October of Dai-Ichi Kangyo Bank Ltd, Fuji Bank Ltd and Industrial Bank of Japan Ltd will create the world's largest bank, Mizuho Financial Group, with around 135 trillion yen ($1.27 trillion) in assets.

The second largest will be the German banking giant to be created by the merger announced last week of Deutsche Bank AG and Dresdner Bank, with combined assets of $1.2 trillion, analysts say.

(Reuters)