PARIS/BRUSSELS France and Belgium are expected to finalize plans this weekend to break up Dexia (DEXI.BR), which helps finance hundreds of towns in both countries and became the first European bank to fall victim to the euro zone crisis.
Dexia, whose board is likely to meet on Sunday, was forced to seek government help earlier this week after a liquidity crunch hobbled the lender and sent its shares into a tailspin.
The bank's implosion has added to investors' worries about the solidity of European banks and has coincided with increased European Union talk about coordinated action to recapitalize banks across the continent.
"The need to rescue Dexia is symbolic of the uncertainty that characterizes the banking sector," said Eric Galiegue, president of Valquant, an independent research firm. "Who would have imagined that a bank so linked with European construction would end up being dismantled?"
Some investors also view the response to Dexia's woes as a test of European governments' ability to take decisive action to rescue banks if the euro zone debt crisis worsens.
France and Belgium have guaranteed Dexia's financing, paving the way for a new rescue for the bank, which is struggling to wind down billions of euros in toxic assets accumulated during an overambitious expansion plan.
But there were signs that the details of the rescue were proving troublesome, as a Dexia board meeting originally scheduled for Saturday slipped back to Sunday.
Still, a source close to the talks was confident the bank's future would be determined before the opening of markets on Monday morning.
"Dexia's funeral will be announced on Sunday," the source said.
Belgium's federal government and its regions have clashed over the bank's fate, with the country's national government favoring a nationalization of its Belgian retail unit but facing stiff opposition from regions who fear the loss of 1 billion euros they contributed to an initial Dexia rescue.
Assuming those differences are resolved, France and Belgium still need to agree on how much each will contribute to a broader Dexia overhaul.
That overhaul will probably see the sale of healthy units such as Denizbank in Turkey and a takeover of its French municipal finance arm by two French state banks, including Dexia's largest shareholder, Caisse des Depots and Consignations, which has a 17.6 percent stake.
Belgian and French financial experts began talks on Thursday, but politicians from each country have yet to enter discussions.
Dexia's shares have been suspended since Thursday afternoon and are down 42 percent since last Friday.
The bank's meltdown has worried some of its Belgian depositors, who earlier this week overwhelmed the bank's telephone helpline.
On a broader level it has heightened concern about other European banks' solidity, though Societe Generale (SOGN.PA) Chief Executive Frederic Oudea told Reuters in an interview on Friday that Dexia's circumstances were specific to itself, and "people should not expect further problems with the system.
(Reporting By Christian Plumb and Phil Blenkinsop; Additional reporting by Alexandre Boksenbaum-Granier and Sophie Sassard; Editing by Will Waterman)