Relentless consolidation in the global banking industry is the driving force behind the merger of Union Bank of Switzerland (UBS) and Swiss Bank Corp (SBC) into the world's second-biggest bank.

As US investment banking giants such as Merrill Lynch and Morgan Stanley continue to extend their global reach, European banks are anxious to be among the five or six major players expected to emerge on top.

"This merger is another sign of consolidation in the financial sector, and there should be more and more in the future," commented Massimo Buonomo, a European banking analyst for Credit Lyonnais Laing.

Other mergers or takeovers in Europe are likely to follow, which could see German banks move into the heavily-fragmented French banking sector, according to analysts. Until now, most consolidation in Europe has been on a national level.

The Swiss banking colossus that will emerge from the merger and Deutsche Bank, Germany's largest bank, will be the leading European contenders to take on the top-tier US investment banks, analysts believe.

Investment banking and asset management constitute the terrain on which this fierce cross-border battle is being fought, rather than retail banking, which remains a largely domestic activity.

Deutsche Bank owns the London finance house, Deutsche Morgan Grenfell, which it has built up into a major international player through aggressive expansion.

UBS-SBC will be the world's largest fund manager, and will provide investment banking via Warburg Dillon Read, the SBC-owned London bank which this year acquired Dillon Read, a venerable but faded Wall Street bank.

However, the lack of a solid position in the United States remains a notable "weakness", analysts said.

The pressure on European banks to consolidate intensified after a wave of restructuring in the United States which greatly strengthened the position of the leading finance houses.