IF the merger talks between Irish Permanent and Irish Life are successfully concluded, a formidable third force will come into being in the Irish market. The marriage of the State's biggest mortgage lender and the largest life assurance player will create a powerful rival for the two main banks.

The combined entity would be in a particularly strong position to immediately make acquisitions. Assuming Irish Life was willing to dispose of some of its non-core assets, analysts estimate the new business could spend up to £1 billion on further deals.

This would make it easier for Irish Permanent to pursue its interest in acquiring the State-owned ICC Bank. Irish Permanent yesterday reaffirmed its interest in bidding for the bank when the sale process commences, but would probably be stretched to buy it for cash without recourse to its own shareholders. The new entity could also set its sights on institutions such as National Irish Bank or Anglo Irish Bank, or possibly even a merged TSB/ACC.

The addition of ICC Bank would bring a business banking mix to the new group, although ICC's customers are concentrated on the SME sector and most also have relationships with other banking groups. Irish Permanent's bid for ICC Bank is unlikely to have any impact on the current discussions, which are still at a preliminary stage, according to company sources. Irish Life is already well aware of its new suitor's keen interest in the State bank.

The merger is partly a defensive move by both institutions. Irish Permanent is hoping to avoid becoming the subject of a takeover by Abbey National or another British or European institution, once it loses it legislative protection from such a bid from the end of next year. Abbey National has always appeared the obvious candidate to swallow up Irish Permanent having already built a 9 per cent stake in the group since it was floated on the Irish and London markets four years ago.

Yesterday, Abbey National chief executive Mr Ian Harley dismissed suggestions that the proposed merger was a spoiler to its own aspirations in Ireland. Its stake in the bank was always a "one-way-bet" as an option for the future and had seen a healthy return on its investment to date.

At the outset, the merged entity would have three strategic shareholders - Abbey National, Krediet Bank and AGF. Together they would hold between 3 and 4 per cent of the total stock while each would also have significant trading relationships.

Irish Life similarly has been the focus of attention as a potential takeover target. Its dominance in the Irish life assurance market is very attractive to British financial institutions and some of the larger European groups looking for growth and more significantly as a foothold in a part of the new single currency zone.

Opportunities to buy life assurance businesses in the British market are pretty thin on the ground and the major banks there would have to look to other markets to add this activity to their operations.

For the time being, if the talks are successfully concluded, both institutions may have realised their objectives. However, in the longer term, they may create a more attractive takeover target in a market where consolidation is set to continue.

In the interim, the deal offers a number of revenue and cost benefits, but is likely to result in job losses and some winding down in already established relationships.