Frankfurt - Germany's Commerzbank AG triggered a major reshaping of the country's fragmented banking business Sunday when it agreed Sunday to pay 9.8 billion euros (14.4 billion dollars) to buy rival Dresdner.

Commerzbank and Allianz announced the agreement after their supervisory boards signed off on merging Germany's second and third biggest banks at separate meetings Sunday.

With total assets of about 1.09 trillion euros and 12.3 million German customers, forging a new merged Commerzbank-Dresdner bank will result in the emergence of new banking force in Europe's biggest economy.

However, Deutsche Bank AG, which failed in a bid to merge with Dresdner eight years ago, would remain the largest bank in the country with assets totalling about 2 trillion euros.

But the talk of the merger has already set the alarm bells ringing among unions amid concerns that a corporate marriage between the two banks could lead to job cuts of at least 10,000 from the financial houses' combined workforce of about 72,000 employees.

Many of the around 1,900 branches offices of a combined Dresdner- Commerzbank bank are located close to each other.

Under the deal, Frankfurt-based Commerzbank is to buy the 136-year-old Dresdner in two steps, starting by acquiring 60.2 per cent of its cross-town rival this year and the rest in 2009.

Munich-based Allianz, which is Europe's biggest insurer, is to retain a stake of about 30 per cent in the new banking group and to take over risks totalling 975 million euros, which are linked to the global financial crisis and credit crunch.

Allianz is also to acquire Commerzbank's funds business Cominvest for about 700 million euros.

The other possible contender for Dresdner, the state-owned China Development bank left the negotiations empty handed.

Sunday's announcement is the climax of months speculation about a tie-up between Dresdner and Germany's second biggest listed bank which was triggered by Allianz's announcement in March than it planned to sell off its banking operation.

The Commerzbank-Dresdner agreement is also likely result in a shakeout at Dresdner's struggling investment house Dresdner Kleinwort, which has been badly hit by the financial market crisis and the credit squeeze.

Indeed, the negotiations over the possible sale of Dresdner to Commerzbank have also been held against the backdrop of worries about the impact on both banks of the fallout from the US subprime mortgage market crisis.

While Dresdner this month posted its fourth consecutive quarterly loss in the three months to the end of June, Commerzbank's mortgage group Eurohypo has been forced to beef up its loss provisions.

But investors having betting on Allianz and Commerzbank reaching a deal over Dresdner's future.

While Commerzbank shares have slipped in recent days on concerns about the integration costs resulting from acquiring Dresdner, Allianz shares have been rising on hopes that it may now bring to an end an unhappy period in its corporate history.

Allianz paid about 23 billion euros for Dresdner in 2001 as part of an ambitious plan to sell its pension and insurance schemes through Dresdner's branch network.

However, since then Dresdner earnings have undercut both Allianz's profits and its share price.

Coming in the wake of a series of restructuring moves in the German banking sector, the Dresdner-Commerzbank deal could be part of a prelude to the two banks launching what would be a three-way merger with Deutsche Post AG, which has 14.5 million customers and more than 800 branches.

Deutsche Postbank's parent, the postal and logistics group Deutsche Post AG, has indicated it will decide in the coming months whether to sell off a big stake in its banking arm.

In July, the leading US financial house Citigroup Inc sold off its German consumer finance and banking operations to France's Credit Mutual Group for 4.9 billion euros. (dpa)