Nationwide, the world's biggest building society, is set to merge with rival Portman, the country's third largest, to create a mutual institution with total assets of over 150 billion pounds.
Nationwide, Britain's biggest customer owned lender and the fourth biggest mortgage provider, said the merger would give it a leading position in both mortgage and savings markets, with over 13 million members.
This important decision to merge two of the largest and most successful UK building societies will create an organisation of formidable strength and size, Robert Sharpe, chief executive of Portman, said in a statement.
If building societies are to continue to compete successfully with the retail banks, they need to enjoy comparable economies of scale.
The merger is expected to become effective by the end of September 2007.
Nationwide's current group finance director, Graham Beale, will become chief executive of Nationwide next April, replacing Philip Williamson. He will subsequently become chief executive of the enlarged group, which keeps the Nationwide name.
Nationwide chairman Jonathan Agnew is set to retire next July and will be replaced by his current deputy, Geoffrey Howe. Portman's current chairman, Bill Tudor John, will become deputy chairman of the new group.
Portman members are expected to receive a minimum merger bonus of 200 pounds, representing a distribution of over 70 percent of Portman's general reserves at the end of June.