Itau acquires Unibanco, forming biggest Latam bank

* Deal creates largest financial group in Latin America

* New bank will have 575.1 billion reais in assets

* Itau shares soar 13 percent, Unibanco up 7 percent

(Adds analyst comments, details on deal, updates shares)

By Todd Benson and Elzio Barreto

SAO PAULO (Reuters) - Brazilian bank Itau ITAU4.SA ITU.N will acquire smaller rival Unibanco UBBR11.SA UBB.N in an all-stock deal that will create the largest financial group in Latin America, the companies said on Monday.

The tie-up comes as banks around the world are under heavy pressure from the global financial crisis, which has reduced the availability of credit and forced a consolidation of the banking industry from the United States to Europe.

The deal also caps weeks of frenzied activity in Brazil's financial sector, with big banks like Itau, Unibanco and Bradesco (BBDC4.SA) (BBD.N) taking advantage of looser central bank regulations to snap up loan portfolios from smaller firms squeezed by the credit crunch.

With the global crisis battering banks around the globe, Itau and Unibanco rushed out their third-quarter results ahead of schedule in recent weeks to reassure investors that they were not overexposed to foreign currency derivatives. Both reported strong profits, sparking a rebound in their shares.

"We shouldn't let the current situation contaminate our analysis into thinking that one bank bought the other because it was in trouble," said Luiz Miguel Santacreu, a bank analyst at Austin Rating in Sao Paulo. "This is about the consolidation of the banking sector globally and in Brazil."

Still, the transaction -- which Itau and Unibanco said they had been negotiating for the last 15 months -- cast a spotlight on the Brazilian financial sector, with some analysts speculating that some smaller banks may need to be bought to rescue them from trouble.

The deal could also put pressure on Bradesco, which has long been the largest private-sector bank in Brazil, to pursue acquisitions in a bid to hold on to the No. 1 ranking among non-government banks.

"More consolidation is likely, but all that's left are the smaller and medium-sized banks," said Nicholas Barbarisi, a managing partner at Hera Investment in Sao Paulo.

SHARES SOAR

The new company, to be called Itau Unibanco Holding, will have assets of 575.1 billion reais ($265 billion), thrusting it ahead of state-run Banco do Brasil (BBAS3.SA), currently the biggest bank in Latin America in terms of assets.

The new bank will start off with 4,800 branches, about 18 percent of Brazil's banking network, and 14.5 million clients. Its credit portfolio will also account for about 19 percent of all lending in Brazil, the banks said.

"This creates a financial institution with the ability to compete on the international stage with the biggest global banks," the companies said in a joint statement that called the transaction a merger.

The banks' shares soared on the news, with Itau surging 13.5 percent to 26.43 reais and Unibanco jumping 7.6 percent to 14.78 reais in afternoon trade. The benchmark Bovespa index .BVSP was up 1.8 percent.

Unibanco, which this year lost the No. 3 ranking among non-government banks in Brazil to Spain's Santander (SAN.MC), has long been rumored to be a takeover target. But until now, it had insisted on remaining independent while its largest rivals continued to expand aggressively.

"Unibanco didn't gain the scale it needed to compete with Itau and Bradesco," said Daniel Lemos, a bank analyst at Corretora Socopa, a Sao Paulo brokerage.

Under the terms of the deal, Itau's holding company, Investimentos Itau SA (ITSA4.SA), will hold 66 percent of Itau Unibanco Participacoes, which will control Itau Unibanco Holding. Itau will also hold a direct 18 percent stake in Itau Unibanco Holding.

Unibanco will have a 33 percent stake in Itau Unibanco Participacoes. Bank of America (BAC.N), which holds 7.3 percent of Itau, will own 5.4 percent of the new combined firm.

Unibanco Chief Executive Pedro Moreira Salles will be chairman of the new group; Itau Chief Executive Roberto Setubal will be CEO. The group's board will have 14 members, eight of them independent and six named by Itau and Unibanco.

The deal still must be approved by Brazil's central bank and antitrust regulators.

($1 = 2.17 reais)

(Additional reporting by Alexandre Caverni and Aluisio Alves, editing by Matthew Lewis)