UPDATE 2-Japanese banks Ikeda and Senshu may merge

(Adds analyst comment, background)

By David Dolan

TOKYO, Feb 21 (Reuters) - Japanese regional lenders Bank of Ikeda Ltd (8375.T: Quote, Profile, Research, Stock Buzz) and Senshu Bank (8372.OS: Quote, Profile, Research, Stock Buzz), a unit of top-ranked Mitsubishi UFJ Financial Group Inc (8306.T: Quote, Profile, Research, Stock Buzz), said on Thursday they may merge, the latest sign of consolidation among the country's small banks.

The Nikkei business daily said the banks are likely to agree on the deal by the end of this month and combine this year. The two banks said in separate statements they may start discussions about a merger but nothing had been decided.

Shares of both lenders rose sharply, with Bank of Ikeda jumping 10.6 percent to 3,300 yen by mid-afternoon while Senshu climbed 13 percent to 260 yen. The Tokyo Stock Exchange's index of bank shares rose 2.8 percent.

The combination of the two Osaka-based banks would create the second-largest bank in the greater Osaka area, behind Bank of Kyoto Ltd (8369.T: Quote, Profile, Research, Stock Buzz), the Nikkei said.

It could also raise expectations for increased consolidation among Japan's scores of regional banks, which have been hit by a dwindling customer base and new competition from Japan Post [JP.UL].

So far, Kansai, or Japan's western region, has not seen local bank consolidation, said Graeme Knowd, a banking analyst at CLSA Asia-Pacific Markets.

"It's interesting that it's the start of consolidation in Kansai, which hasn't happened (before)," Knowd said. "Kansai, and Osaka in particular, is over-banked."