A full merger would create Germany's second largest bank with a market capitalisation of $44 billion. It would also be a stunning comeback for Dresdner, severely damaged after its failed merger attempt with rival Deutsche Bank AG.

It would also brace Commerzbank against threats to its independence after Dutch holdings company Rebon grabbed a 17 per cent controlling stake and urged it to find an international partner to drive up its share price.Industry sources say that talks between the two banks were still very preliminary. A possible solution would be months away but the need to find common ground has become an increasingly urgent threat to each bank's independence.

Commerzbank has also established contact with other banks beside its Frankfurt rival Dresdner, an industry source said following a newspaper report that the two banks were discussing a merger.

"Talks are at a very early stage. It's not as if there are negotiations. There are contacts aimed at exploring opportunities for cooperation in partial business areas and more broadly," the source said.

Commerzbank shares rose 3.42 percent to 41.16 euros late inthe day, outpacing gains by rivals and a light drop in the German blue chip DAX index, while Dresdner shares rose 1.02 percent to 47.50 euros.

Dresdner has struggled to regain credibility after its planned merger with rival Deutsche Bank AG collapsed in April, leading to the resignation of Dresdner Bank's chief executive and other top managers. The incident moved Dresdner to the top of the European takeover targets list. Merger speculation concerning Commerzbank has intensified in recent months after Rebon became the bank's largest shareholder and made known the fact that it wanted Commerzbank to find an international partner.

Hansgeorg Hofmann, head of Rebon's German unit Cobra Holdings mbH and Dresdner's former chief of investment banking declined to comment on the possibility that he had found a buyer for the stake.

"It's a critical moment right now and I don't want to make any comments to the press," Hofmann said.

Commerzbank has left its door open to possible cooperation with Dresdner for several months now, the source said. But the need for each bank to find a solution to increasing pressure to consolidate has grown increasingly urgent, said a Frankfurt banking source.

"With the whole Rebon stake, the possibility of a merger has acquired a little more urgency," the source said. Chief executives from Commerzbank and Dresdner Bank are not planning to meet this weekend to discuss a possible merger, contrary to some media reports, the source added.

"That's not a sign that this (possible merger) is on or off.It's a sign that it is months in the future," the second source said. A Dresdner-Commerzbank merger would create a German retail and corporate heavyweight with a large international investment banking footprint. Commerzbank has strong retail and Internet-banking operations and prides itself on its close ties with Germany's vibrant Mittelstand, or small- to medium-sized firms.

Dresdner's key asset is its London-based investment bank, Dresdner Kleinwort Benson. Conflict over Kleinwort Benson's fate derailed Dresdner's earlier attempt to merge with Deutsche Bank. Analysts were uncertain about the prospects of a tie-up. "I would strongly recommend that Dresdner doesn't go ahead with this," said Metehan Sen at Sal Oppenheim & Cie in Frankfurt. "I think it's a wrong strategy and would yield nothing." he added.

(Reuters)