The expected deal, which would create the biggest bank in southeast Europe by assets, will help the two lenders avoid turning to a state liquidity support mechanism and is likely to spark more reshuffling in the country's banking sector, analysts said.

"The boards of the two banks will sign the deal early on Monday and the announcement and a press conference will take place at around midday," a banking official close to the deal told Reuters.

Troubled by rating downgrades, deposit outflows and loan impairments in the wake of the country's worst recession in four decades, Greek bank shares have tumbled more than 55 percent in the year to date.

"The deal is about a friendly merger between Alpha Bank and Eurobank, with the participation to a significant extent of the Qatar Investment Authority," a senior banker at Alpha Bank told Reuters.

The new entity will have assets of 150 billion euros, 8 million clients and 80 billion euros of deposits, said a third banking official, adding that the banks were very close to a deal.

The Qatar Investment Authority, which is already a shareholder in Alpha, will become a major shareholder in the new group, the officials said . Another banking official said the Gulf Arab state had signed the deal on Saturday.

Analysts welcomed news of the deal between Eurobank, which failed the latest EU-wide bank stress test, and Alpha, saying it could help the two lenders weather the crisis.

"This is a strategic move in the right direction that will protect the two banks from the worst that is ahead for the Greek banking sector," said Takis Zamanis, chief trader at Beta Securities.

"Qatar will probably inject money into the new entity at a time when Greek banks are facing lack of liquidity, losses from the PSI (private sector involvement in the bond swap) and rising loan impairments," he said. "The two banks may avoid asking liquidity from the existing support mechanism."

Investors have been concerned that writedowns from an upcoming bond swap aimed at saving Athens from bankruptcy and loan impairments could force Greek banks to recapitalize and turn to the state for help.

Recourse to Greece's Financial Stability Fund, a 10 billion euro safety net set aside to recapitalize lenders that find it hard to raise funds in the market, would set banks up for restructuring.

Qatar fund

The banking officials provided no detail of the Qatari fund's involvement in the new group but one said it would participate in the new entity through a rights issue.

"The merger, with Qatar's participation, is a very positive move and keeps away the danger for the two banks to go to the support mechanism," said Manos Hatzidakis, analyst at Pegasus Securities. "It is positive because a new, bigger and stronger private group will be created in southeast Europe with a new shareholder."

The deal may also help the new entity open up access to wholesale funding markets.

Greek banks have been shut out from the interbank market and are dependent on the ECB for liquidity, borrowing at its money market operations by putting up Greek government bonds and other assets as collateral.

The latest data show funding from the ECB rose to 103 billion euros at the end of June, about 20 percent of the Greek banking sector's total assets.

Alpha Bank, which one banking official said has been advised on the merger by JP Morgan and Citigroup , has a market capitalisation of 1.068 billion euros. Eurobank has a market capitalisation of 1.017 billion euros. Eurobank shares have fallen 51 percent since the beginning of the year and Alpha shares are down 50 percent.

National Bank of Greece is the country's largest lender, with a market capitalisation of 2.877 billion euros.

The government, which has long pressed banks to merge to better face the crisis, declined to comment on Saturday.

Greek banks will publish their first half results next week, starting with Eurobank on Monday.