Australian Prime Minister Kevin Rudd says he is committed to maintaining competition in the banking sector, after leading banks Westpac and St George agreed to merge, creating the nation's biggest financial services group.

Mr Rudd, whose government has in the past criticised bank fees, refused to comment on the merger, but says Canberra will closely monitor the merger, which will create a bank worth around $US62 billion.

"The key thing for us is to make sure we've got enough competition in the Australian banking industry," he said in a television interview.

"We'll watch this one carefully, but I don't want to issue any edict about what the market should do."

The proposed merger will require clearance from Australia's competition regulators and Treasurer Wayne Swan.

It is also expected to test a government policy aimed at preventing mergers between the country's four largest banks, which do not include St George.

Westpac and St George have signed an agreement providing for a two-week exclusivity period, during which they will negotiate the terms of a merger implementation agreement.

St George's board's decision to accept the offer is conditional on an independent expert's report that the deal will be in shareholders' best interest, and that a better offer does not emerge.

Australia's second-largest bank has refused to rule out making a counter offer for St George.

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