Greece's largest bank merger in decades was thrown into doubt as it approached completion, after Alpha Bank said it first needed to assess the impact of the country's planned debt swap scheme before teaming up with EFG Eurobank .

Alpha and EFG Eurobank agreed last August to create Greece's biggest bank to better cope with the debt crisis, which has caused deposit outflows and rising loan impairments.

But the debt swap plan, which negotiators say is close to a deal, is now set to cause much deeper losses to banks than when the merger was agreed, meaning that they will face substantially bigger recapitalisation needs.

Several analysts said Alpha Bank, whose exposure to junk-rated Greek government bonds is about half that of Eurobank, may be seeking better terms for the deal which had been expected to complete in coming weeks.

Alpha Bank seems to be wanting to renegotiate the share swap ratio of the merger, not pulling out of the deal, said a banking analyst who declined to be named.

The two sides had agreed to exchange 5 Alpha bank shares for every 7 shares of EFG.

Alpha, Greece's third-largest lender, said on Monday the timetable and outcome of the merger plan were uncertain because of the debt swap scheme. As soon as definitive facts emerge, the bank will duly update its disclosure, it said.

Battered by deposit outflows, sovereign debt downgrades and rising bad loans, Greek banks have been urged to explore tie-ups in the hope of regaining access to wholesale funding markets.

The banks are likely to have to turn to state support, meaning potential nationalisation, after the country's debt restructuring.

There are financial issues that need to be looked into, such as the net present value loss due to the bond swap. This does not mean the merger agreement is collapsing or that it will not go ahead, said an Alpha Bank official who did not want to be named.

RENEGOTIATION?

EFG Eurobank, which is the country's second-largest bank and holds 6.9 billion euros in Greek government bonds while Alpha has around 3.8 billion euros, said there was no reason to delay the merger plans.

Eurobank informs that it is consulting with Alpha Bank in order to complete the merger process the soonest possible, EFG said.

A banking source close to the two banks said talks were ongoing between top officials from the two banks.

The government, which has been pushing for mergers for months, together with the European Union and the International Monetary Fund, said on Monday that there was no reason for the government debt swap plan to affect the merger.

The Greek regulator suspended trade in the shares of the two banks earlier on Monday. Before that, shares in Alpha Bank were up 9.4 percent at 1.28 euros, outperforming the Athens bourse's banking index <.FTATBNK>. Eurobank shares were trading 0.25 percent softer at 0.80 euros.

(Writing by Ingrid Melander; editing by Erica Billingham)