Martin said legislation would be introduced in parliament next year to allow branches of foreign banks to open in Canada without those banks having to be capitalised separately in this country, as is now the case. Being forced to open fully capitalised separate operations has been a major obstacle for foreign banks wanting to set up branches here.

"Certainly following Paul Martin's announcement on Monday, there's a very measurable appetite for getting foreign bank branching legislation introduced," a finance department official said on Tuesday.

In a widely anticipated move, Martin gave the thumbs down on Monday to Toronto-Dominion Bank's proposed merger with Canadian Imperial Bank of Commerce and Royal Bank of Canada's merger with Bank of Montreal.

He said no mergers would be allowed untilthe government is able to overhaul the entire banking sector to enhance competition.

Martin pointed to a report by the competition bureau that said there were problems with the mergers that could not be easily remedied. It noted the merged banks would control too many branches, too much of the credit-card industry and too much of the retail brokerage market in Canada.

"Whereas the merger proponents wanted the mergers to be allowed in order to change the status quo, we believe the status quo must be changed before any merger can be considered," Martin said in his statement.

Allowing foreign banks to set up branches in Canada more easily is seen by the government as a way of increasing the level of competition.

The finance department spokesman said the government was aiming to introduce enabling legislation in February. "The sooner the better," he said.

It will be the first financial services reform moved on by the Liberal Party government since it was first elected in 1993.

As it stands, Canada isone of the last major countries that has strict entry rules for foreign banks, barriers that have in the past been encouraged by the domestic industry. Canadian banks, however, have changed their tune as they have themselves expanded overseas.

"Foreign banks have to be given greater access to the Canadian retail market," the Globe and Mail, one of Canada's national newspaper, said in an editorial on Tuesday. "A number of foreign institutions have come on via phone and Internet services, but they are still marginal players using marginal vehicles."

"Foreign banks should no longer have to set up separately capitalised subsidiaries in Canada -- (this would allow them) to leverage overseas weight to compete with Canada's dominant players," the Globe said.

Canadian bankers had argued that the mergers they proposed were the best way of allowing them to compete against an influx of foreign competition.

"Either we team up in Canada, or a day at a time, we will be handing control of the financial servicesindustry to the Americans and the Europeans," Alan McNally, chairman of Chicago-based Harris Bank, the US subsidiary of Bank of Montreal, said.

McNally said that the push by giant foreign banks could not be prevented, but allowing Canadian banks to merge would allow them to compete against the foreign banks at home and abroad.