UPDATE 1-Israel anti-trust watchdog rejects Mizrahi-Union bank deal

(Adds details, comments from authority and Mizrahi, share reaction)

JERUSALEM, May 30 (Reuters) - Israel’s anti-trust authority said on Wednesday it had rejected a planned merger between Mizrahi-Tefahot Bank and Union Bank after a review that pitted two regulators against each other on the consequences for banking competition.

Mizrahi, Israel’s third-largest bank, late in 2017 had agreed to buy Union, the country’s sixth-largest, in an all share deal valued at 1.4 billion shekels ($391 million).

“The disappearance of Union Bank as a competitor likely would harm the already limited competition over private customers in the banking sector,” the anti-trust authority said.

It said Union Bank, the smallest bank in Israel, offered certain incentives to customers that would likely disappear in a merger and that could lead to a rise in the cost of credit.

The regulator also said the planned merger came at a time when there were a number of reforms aimed at improving banking competition under consideration.

The ruling by Ori Schwartz, the acting anti-trust commissioner, is final but the parties can appeal. When asked about an appeal, a Mizrahi spokesman said the bank would think about it and then decide.

The Bank of Israel, the country’s banking regulator, has been a longstanding supporter of the proposed deal.

Supervisor of Banks Hedva Ber told reporters on Wednesday the merger would not hurt competition but would help it by enabling a mid-sized bank to compete more effectively with Israel’s two largest lenders -- Hapoalim and Leumi .

These two together hold a 56 percent share of the bank credit supply market. The remaining 44 percent is held by the next three banks.

“Our banking understanding is that it was possible to approve the merger,” Ber said.

Despite the central bank’s backing, the deal faced heavy opposition from Israel’s finance and economy ministers as well as several other politicians. Finance Minister Moshe Kahlon in 2015 had run on a platform of reforming Israel’s banks and lowering the cost of credit.

The head of Israel’s parliamentary finance committee last November had warned the Bank of Israel that it could be stripped of its banking supervisory role over its support of the merger.

Mizrahi criticised the anti-trust authority’s decision, saying it was unreasonable, based on unfounded arguments and completely ignored the central bank’s expertise in banking competition.

“The imaginary competitive fears held on to by the anti-trust authority are baseless,” it said in a statement. “The merger not only would have not have harmed competition but would have dramatically benefited the consumer.”

Union’s shares closed down 2.5 percent, while Mizrahi’s were flat. ($1 = 3.5808 shekels) (Reporting by Steven Scheer; Editing by Mark Potter and Jane Merriman)