Italy's Banca Intesa and Sanpaolo IMI led the "eld after announcing they may combine to create the country's largest lender by branches.

Nevertheless, the markets were little changed on the week, with the Dow Jones Stoxx 600 index "nishing at 331.41 as investors assessed the impact of higher interest rates on economic growth.

The Stoxx 600 has dropped 3.6% from this year's high reached in May as central banks in Europe, the US and Asia raised borrowing costs to contain in"ation.

The boards of Intesa and Sanpaolo IMI were due to meet yesterday to discuss the merger. The deal "will be the start of a new wave of mergers and will involve European banks as well", said Massimiliano Romano, an analyst at Concentric Italia in Milan.

The news helped lift bank shares on Friday, with Germany's Commerzbank advancing 3.7% to 27.12 and ABN Amro of the Netherlands gaining 2.1% to 21.77.

Barclays, the third-biggest bank in the UK, gained 0.9% to 649.5p.

UniCredit, currently Italy's biggest lender, bucked the trend, sliding 1.8% on Friday to 6.09.

Merger speculation was fuelled further by Bank of America chief executive Kenneth Lewis, who said the US's second-biggest bank by assets may be considering a transformational acquisition, according to a report on "nancial news network CNBC. Barclays and Commerzbank declined to con"rm or deny whether they had received takeover offers.

"There could be a new buzz word in the banking sector:

transformational deals, " said Marco Overmeer, a trader at SNS Securities in Amsterdam.

"Everybody is looking at everybody.

The news we are getting is an indication that something really big is going to happen in banking land."

In other sectors, shares of Ciba, the world's largest maker of colours for plastics, retreated 1.8% to 71.15 Swiss francs on Friday after UBS cut its recommendation on the stock to 'reduce' from 'neutral', citing concerns over restructuring costs and high raw material prices.

Opap, the world's third-largest publicly traded gaming company, dropped the most in the Stoxx 600, tumbling 7.6% to 27.2 after second-quarter earnings missed analysts' targets.

BHP Billiton, the world's biggest mining company, rose 1.1% to 1,000p on Friday after chief executive Chip Goodyear said copper and nickel prices may increase because of demand from manufacturers. His comments also lifted Swiss mining company Xstrata, which climbed 2.9% to 2,338p. Prices of copper reached a record in May, and nickel more than doubled this year as demand surged led by China.

Vodafone added 1.4% to 112.25p on Friday after Belgacom, Belgium's biggest-telephone company, agreed to buy its stake in Proximus for 2bn to gain full control of its wireless unit. The deal "could result in signi"cant shortterm up side" for Vodafone's stock, Bradley Mcmaster, an analyst at ABN Amro, wrote in a note to clients.