The announcement on the two leading lenders, which have a total of some 1,000 branches in Greece, pushed up the Athens stock exchange index by 3.16 percent as the finance minister welcomed the move.

"The government has repeatedly pointed out that the Greek banking system must pursue a restructuring," Finance Minister George Papaconstantinou said.

"The talks between NBG and Alpha Bank are a positive move towards this direction," he said.

The shares of other prominent Greek lenders Eurobank and Piraeus Bank closed with gains of over 15 percent after NBG revealed the merger proposal.

"National Bank of Greece confirms that it submitted a proposal to Alpha Bank for the merger of the two banks," NBG said.

The offer had been made on January 18, it added.

"NBG and Alpha entered into a non-disclosure, exclusivity and standstill agreement on February 3 and their respective management teams have held talks to discuss the terms of the proposal," the bank added.

"The proposed merger would create the leading bank in Greece which we believe would be pivotal in supporting the recovery of the Greek economy," NBG chairman Vassilis Rapanos said.

NBG said the new group would have the strongest balance sheet in Greece after the completion of a capital plan worth 2.8 billion euros ($3.8 billion).

"The new group would have the strongest capital adequacy and quality among the largest banks in Greece, enabling it to comply with increasing capital requirements under the new regulatory framework...and enhancing its ability to absorb the impact of systemic risks," it said.

The combined group would have a balance sheet of 200 billion euros, ranking thirtieth by assets and twenty-eighth by market capitalisation among European banks, NBG said.

Alpha shareholders would receive eight new NBG shares for every 11 outstanding Alpha shares, the statement said.

The relative ownership rights in the new entity for NBG and Alpha shareholders would be 71 percent and 29 percent respectively.

Under the proposal, NBG would propose the group chief executive officer and non-executive vice chairman while Alpha would nominate the non-executive chairman.

The new group would operate under NBG's name and Alpha's logo.

The deal must be approved by the banks' respective boards of directors.

Trading on the two banks' shares on the Athens stock exchange had earlier been interrupted, with NBG gaining 2.14 percent and Alpha up 6.32 percent.

The Greek state, which is facing an unprecedented debt crisis that has affected market liquidity, has repeatedly encouraged Greek banks to pool their resources to help bolster the recession-hit economy.

Both NBG and Alpha had their balance books hammered in the first nine months of last year with each recording a fall of over 70 percent in net profits.

They were among five Greek lenders to pass EU-wide stress tests with varying success in July, while a sixth bank, ATEbank, failed to make the grade.

But the deteriorating state of Greek public finances has cast a pall on the country's banking sector which has significant exposure to state debt, which has hit rock bottom after successive credit rating downgrades.

Ratings agency Moody's in December placed the deposit and debt standing of six Greek banks on review for a possible downgrade after similarly placing Greece's own sovereign ratings on negative watch.

The two lenders had attempted to merge a decade ago, just before Greece joined the eurozone.