By Lefteris Papadimas and George Georgiopoulos
ATHENS (Reuters) - National Bank's plan to absorb Eurobank <EFGr.AT> to form Greece's biggest banking group will be suspended until both are recapitalised, and a state bank support fund will decide if the they should merge, a Finance Ministry official said on Sunday.
National acquired 84.3 percent of Eurobank via a share swap in February with a view to absorbing it as part of broader consolidation in the banking industry to cope with fallout from Greece's debt crisis and deep recession.
But the plan raised concerns at the lenders' "troika" - European Union, European Central Bank and International Monetary Fund - that a merger would form a bank too big relative to Greece's gross domestic product.
"The final decision on the merger will be taken by the Hellenic Financial Stability Fund (HFSF)," the official, who declined to be named, told reporters.
Together, the two banks need 15.6 billion euros in fresh capital to shore up their solvency ratios to levels set by the central bank after incurring losses from a sovereign debt writedown and impaired loans.
Under a recapitalisation scheme agreed with Greece's international lenders, most of the fresh capital will be provided by the HFSF, a state bank support fund, in exchange for new shares and contingent convertible bonds.
To stay private, banks must ensure that at least 10 percent of their share offerings is taken up by private investors.
"The two banks sent letters to the central bank saying it is unlikely they will be able to raise the 10 percent from the market," the official said.
This means that both banks will fall under the full control of the HFSF bailout fund.
The official also confirmed what two bankers had earlier told Reuters: that the two banks would be recapitalised separately.
After their recapitalisation, the HFSF will decide whether they will go ahead and integrate.
"I do not want to prejudge the HFSF's decision," the official said.
National's current stake in Eurobank will be severely diluted as a result of the recapitalisation and analysts expect the banks' shares to come under heavy selling pressure on Monday.
"The market was partly discounting such an outcome but did not expect decisions like the suspension of the merger to be taken so fast. I expect their shares to plunge on Monday," said Takis Zamanis, a chief trader at Athens-based Beta Securities.
(Reporting by Lefteris Papadimas; Editing by Kevin Liffey)