Frankfurt  - Germany could be on the brink of a major shakeout in its fragmented banking industry with investors betting Monday on an announcement this week of an 8-billion-euro (12 billion-dollar) merger between two of the nation's leading banks.

Indeed, shares in Allianz SE jumped more than 1.0 per cent in early trading Monday on speculation that the German giant insurer could announce this week a deal to merge its troubled banking offshoot Frankfurt-based Dresdner with cross-town rival Commerzbank AG.

A series of newspapers have reported that talks between Commerzbank and Dresdner have entered a critical stage with the reports including outlines of a tie up which would clear the way for the biggest restructuring of the German banking system in more than 7 years.

The Financial Times Deutschland reported that after months of talks the Commerzbank bank board is set to reach a decision on the merger by the end of the week.

"It must now some to an end - one way or the other," Germany's weekly Welt am Sonntag quoted a company official close to the negotiations with the newspaper also saying that the two banks had agreed to a structure for the transaction.

However, neither Dresdner Bank nor Commerzbank, which is Germany's second biggest listed bank, were prepared to comment on the talks, which have been the subject of continuing speculation since Allianz announced in March plans to sell off its banking operation.

Either way, shares in Allianz jumped 1.4 per cent to about 109 euros Monday on hopes that it may have found a solution for Dresdner, which has been badly hit by the global credit crunch.

This in turn has taken its toll on Allianz's bottom line and undercut its share price.

Earlier this month Allianz announced the company had been forced to abandon its earnings forecast in the face of tough financial markets.

While Welt am Sonntag said Allianz would hold a 30-per-cent stake in the new merged Dresdner-Commerzbank group, analysts estimate that a Dresdner sale could generate about 8 billion euros for the Munich-based insurer.

Under the merger deal, Dresdner's investment house Dresdner Kleinwort would also face a major restructuring.

But company sources have also indicated to the Deutsche Presse-Agentur dpa that the deal could still fall apart as a result of questions arising about the valuations placed on aspects of the merger.

Also overhanging the negotiations are worries about the impact on both banks of the fallout from the US subprime mortgage market crisis.

While Dresdner this month posted its fourth consecutive quarterly loss in the three months to the end of June, Commerzbank's mortgage group Eurohypo has been forced to beef up its loss provisions.

Allianz paid 21 billion dollars for Dresdner in 2001 as part of an ambitious plan to sell its pension and insurance schemes through Dresdner's network of more than 800 branches.

Meanwhile, Commerzbank's shares slumped about 1.5 per cent to 20.20 euros in early trading Monday on investors' concerns about the costs involved in integrating Dresdner.

Moves by Dresdner and Commerzbank to forge a tie-up could be part of a prelude to the two banks launching what would be a three-way merger with Deutsche Post AG to form a new banking powerhouse in Europe's biggest economy with a total of 26.5 million customers.

Deutsche Postbank's parent, the postal and logistics group Deutsche Post AG, has indicated it will decide in the coming months whether to sell off a big stake in its banking arm.

According to German media reports, Spain's biggest bank, Banco Santander had also been in the running for Dresdner with the China Development Bank also reportedly expressing an interest in th Frankfurt-based bank.

But an announcement on a merger between Dresdner and Commerzbank would be the second time in less than a week that a so-called German solution has been found to an industry problem in the country.

Last week, German auto supplier Continental AG approved a takeover offer by smaller German rival Schaeffler Group early Thursday after weeks of talks and a hike in Schaeffler's offer. (dpa)