SYDNEY - Australian Treasurer Wayne Swan on Thursday approved the merger of rival Westpac Banking Corp. and St George's Bank Ltd, opening the way for the creation of the nation's largest bank.

The merger would "ensure the best possible outcome for both Westpac and St George customers and employees", said Swan, who imposed strict conditions on the deal, however.

"This decision follows a thorough assessment of its impact on the national interest, including factors such as competition, economic efficiency, prudential requirements (and) financial system stability," Swan said.

Under the conditions Swan imposed on the merger, Westpac, Australia's third largest bank, must maintain the existing number of branches and automatic teller machines operated by the two companies.

In addition, Westpac must retain all Westpac and St George retail banking brands and keep dedicated management teams for each of the banks' retail banking distribution.

The decision came after Australia's competition watchdog in August approved the 18.2-billion-dollar (12.1-billion-US) merger, saying it was unlikely to substantially weaken competition in the sector.

The new super bank will boast a larger balance sheet and capital base, as well as broader access to funding markets, making it better placed to withstand systemic shocks, Swan said.

"The St George banking brand will also benefit from Westpac's lower funding costs, helping it to offer lower interest rates on loans."

The two banks agreed in May to merge into one financial services behemoth with assets of about 550 billion dollars (367 billion US) and market capitalisation of about 66 billion dollars.

Swan's announcement came after the Australian stock market had closed.

Westpac ended the day down 2.6 percent while St George Bank closed 5.4 percent lower at 28.00 as the global financial turmoil pummelled the market.