Riga - Latvia's largest indigenous bank, Parex Banka, confirmed that it was seeking government help in what amounts to a partial nationalization in a surprise move on Sunday morning.

Parex Banka is the second largest bank overall in the Baltic country. It posted profits of more than 12 million lats (22 million dollars) in the first nine months of 2008.

A statement released by Parex in the early hours of Sunday morning said, "In accordance with the terms of the agreement between the bank and the Latvian state, 51 per cent of Parex Banka's shares are being sold to the state."

On Saturday night, Latvian Prime Minister Ivars Godmanis emerged from a marathon meeting with finance minister Atis Slakteris to announce, "The government of Latvia today made a decision that the state will become a majority stakeholder in Parex Banka to secure the stability of Latvia's financial system."

The seriousness of the situation into which Parex must have got itself is clear from the token sum the government will pay for its majority stake - just 2 lats (3.65 dollars).

Part of the reason the move was a surprise comes from the fact that the list of existing shareholders is dominated by two of Latvia's richest men, the bank's founders, Valery Kargin and Viktor Krasovitsky.

Despite rumours sweeping the Baltic financial sector in recent weeks that a local bank might ask for a government bail-out, Parex officials had repeatedly stressed the bank's healthy financial position.

Attention will now turn to smaller local banks to see if they make similar requests for government support. The government shares will be held by Hipoteku Banka, which is already state-owned.

Hipoteku Banka chairman Inesis Feiferis told Deutsche Presse-Agentur dpa Sunday that the move did not constitute a merger as the intention was to sell the Parex shares back at a later date.

He also refused to rule out helping other banks, though he said it was unlikely he would be called on to do so.

"I look at life very realistically - maybe, who knows - if it will be important," he said.

The Parex deal had taken two weeks to put together, Feiferis confirmed, and had gone through because Parex plays an important strategic role in the national economy.

He added that the search was now on for a strategic investor to buy back the government's stake in Parex after twelve months - which might even include the Parex shareholders who have just sold up.

Feiferis confirmed that there would be job losses as a result of the move because while branches of the two banks will work separately, tasks such as money collection could be shared.

Apart from Parex, most of the larger banks operating in Latvia, including Swedbank (formerly named Hansabank), SEB and Nordea are owned by Scandinavian financial institutions, so the Latvian government would not be responsible for any bail-outs.

However, finance ministry official Martins Bicevskis told dpa that part of the reason the government chose to act now was "to give a clear message to the whole of society and our partners in Sweden because they are interested in a stable situation in Latvia."

Bicevskis said there was no reason for Parex account holders to panic.

"We have put things back together and we are strong," he said. (dpa)