Commerzbank major shareholder Rebon BV told the Financial Times Deutschland it would support the possible merger only if it boosts Commerzbank's share price. Rebon has said it wants Commerzbank to find an international partner, not a German one.

And an industry source said a merger would be "a sticky issue" for German insurer Allianz AG, which has a 21.5 per cent stake in Dresdner, if it became a joint shareholder with Italian rival Generali, Commerzbank's No. 2 shareholder. "That is an issue that has to be solved," the source said.

Commerzbank shares were up just over 2 per cent at 40.11 euros by 0940 GMT after the banks confirmed talks and aided by a slight upward reweighting of its position in the DAX index of top German industrial shares. At the same time, Dresdner shares edged intonegative territory, down 0.11 euros to 46.06.

The banks said in a joint statement that they would have to assess carefully whether a link-up was feasible. They said no further statements on the talks should be expected in the short-term. Industry sources have said the talks could lead to a full merger.

"The boards of Commerzbank and Dresdner Bank confirm that they are in discussions about a range of possible business combinations," the statement said. "But the discussions are at a very early stage."

The statement follows days of speculation that the two banks are considering a merger that would create Germany's second-largest bank with a market value of about $45 billion, behind Deutsche Bank AG with $52 billion.

"Given the size of the two institutions and the scale of the subject a careful assessment is needed to determine whether a viable concept can be developed," the statement said.

Sources have said that the banks have held a number of meetings since late May to discuss a possible merger thatwould kick-start banking consolidation in Germany following April's collapse of Dresdner's merger with Deutsche Bank.

-- (Reuters)