UPDATE 5-Australia's Westpac Bank eyes St George takeover

(Adds details, Fitch comments)

By Victoria Thieberger

MELBOURNE, May 12 (Reuters) - Australia's Westpac Banking Corp Ltd (WBC.AX: Quote, Profile, Research) unveiled a surprise plan to buy smaller $14 billion rival St George Bank Ltd (SGB.AX: Quote, Profile, Research), in a deal that would create the country's biggest bank by market value.

The proposal by Westpac's new Chief Executive Gail Kelly, who joined the bank less than four months ago after heading up St George for nearly six years, was likely to ignite a wave of consolidation in the country's financial sector.

Westpac said the combined bank would have greater access to funding and generate savings at a time when funding costs have soared because of the global credit crunch.

"It would really upset the others and I believe they would be agitating to perhaps merge as well," Karara Capital investment manager Rohan Walsh said.

The deal would skirt restrictions preventing mergers between Australia's four biggest banks -- since Westpac is fourth and St George is the fifth largest -- but it could provoke large rivals to investigate takeovers of smaller regional banks.

Australian banks have mostly dodged the subprime woes afflicting global banks, but the credit crunch has ramped up their funding costs and their customers are feeling the pinch of higher interest rates.

Westpac and St George put their shares in a trading halt on Monday as they announced they were in confidential merger talks.