"The two guarantee insurers will be merged on November 25 on an equal basis and that will help an early financial recovery," said a joint statement prepared by the two insurance firms.

Financial authorities earlier considered shutting down the two insurers -- South Korea's dominant guarantee insurers -- on fears that their huge losses could further weaken the country's financial system.

But the firms have instead been kept operating because their closedown could have worse effects, analysts said.

Analysts said the government had to keep the insurers going because of the heavy reliance on them by small- and medium-sized concerns for guarantees on fund raisings.

"The demise of the insurance companies could paralyse corporate bond issues by small companies and cause the whole financialsystem to collapse," said Chung Yoo-shin, analyst at Daewoo Research Institute.

A Korea Guarantee spokesman said the merger was necessary to streamline the management of the two insurers, which had been badly shaken by a surge in corporate bankruptcies.

The bankruptcy rate has soared since late last year when a foreign exchange crisis forced South Korea to accept a $58.35 billion bailout arranged by the International Monetary Fund.

The corporate failures and resultant loan defaults have meant much higher payouts by the two insurance firms.

Financial institutions have been increasingly calling in loans guaranteed by the insurance firms or refusing to roll over such loans because of deteriorating financial conditions of the insurers, analysts said.

Liabilities which the two firms had guaranteed totalled 149 trillion won ($107 billion) as of the end of June, including 67 trillion won of corporate bonds, according to government figures.

Corporate bonds guaranteed by the two insurance firms accountedfor about 97 per cent of the country's total guaranteed corporate bonds, analysts said.

Korea Guarantee spokesman Huh Nam-hun said the Korea Asset Management Corp would provide five trillion won to help the merger of the two insurers on the basis of their unretrieved assets from clients.

He said the merged insurer would carry out a rigorous restructuring programme, including a 50 per cent cut in workforce and branches nationwide.

"Wages will be cut by more than 30 per cent on top of a 15 per cent reduction earlier this year. We hope our reforms will help restore confidence in the financial community," Huh said.

The Financial Supervisory Commission earlier said rising payments on clients' defaulted loans and inefficient management had amplified losses at the insurance firms.

It said the outstanding accumulated losses of Korea Guarantee Insurance Co had soared to 1.64 trillion won as of the end of May from a loss of 198.4 billion won a year earlier.

Losses of Hankuk Fidelity & Surety Co deepened to948.5 billion won from 273.8 billion won, it said. Strong competition between the two companies was also to blame for their deterioration, analysts said. In fighting for customers, the firms had overstretched their business, thus increasing their exposure, analysts said.