UPDATE 2-Westpac Bank in takeover talks with St George

(Adds analyst comment)

By Victoria Thieberger

SYDNEY, May 12 (Reuters) - Westpac Banking Corp Ltd (WBC.AX: Quote, Profile, Research, Stock Buzz), Australia's fourth-biggest lender, said it is in talks on an all-share bid for St George Bank Ltd (SGB.AX: Quote, Profile, Research, Stock Buzz), which has a market value of A$15 billion ($14 billion), to create Australia's largest home lending and wealth management provider.

A combination of Westpac, with a market value of A$49 billion, would create the country's largest bank, eclipsing Commonwealth Bank of Australia (CBA.AX: Quote, Profile, Research, Stock Buzz) which has a market value of about A$58 billion. It would come amid tough times for banks as funding costs have soared amid the global credit crunch.

"Fascinating. It makes a lot of sense. St George is about a third of the size of Westpac and the cost synergies they can extract out of St George would be staggering," said Peter Vann, head of investment research at Constellation Capital Management.

"They will be paying a premium over St George's closing price, there's no doubt about that. Ten or twenty percent, it depends how the offer comes through."

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

St George, which has a lower credit rating than its larger rivals, has been struggling with soaring funding costs in the debt markets. Earlier in the month, it had to pay more than 10 times the margin it paid a year ago for a debt issue.

Trading in the shares of both companies was placed on halt on Monday. St George said it requested the trading halt to allow confidential merger discussions with Westpac.