NEW YORK -(Dow Jones)- The proposed merger between Regions Financial Corp. (NYSE:RF) ( RF) and AmSouth Bancorp (NYSE:ASO) (ASO) could be a boon to some of the banks' rivals, but not necessarily because they're more likely to be bought.

The fast-growing southeastern U.S. has emerged as one of the country's most sought-after banking markets. The marriage of Regions and AmSouth, already two elite players, will spawn a giant Birmingham, Ala.-based bank that could be better positioned to compete in Florida and other coveted markets against juggernauts like Bank of America Corp. (NYSE:BAC) (BAC), Wachovia Corp. (NYSE:WB) (WB) and SunTrust Banks Inc. (NYSE:STI) (STI).

At the same time, though, industry observers expect the deal to open inroads for smaller banks that compete against Regions and AmSouth in Alabama and other southern states.

In order to get regulatory approval for the merger, Regions and AmSouth will need to shed about $2.5 billion in deposits, company executives said Thursday. They plan to do that by selling or closing roughly 150 branches, primarily in Alabama and Tennessee.

Closing those branches will send customers to other banks. Equally important, major mergers often cause service disruptions that can anger customers, making them susceptible for poaching by rivals.

"A lot of their competitors could feast on this acquisition," said Christopher Marinac of independent research firm FIG Partners LLC in Atlanta. Rival banks " can sit back and try to take advantage of any confusion that ensues."

Regions Financial (NYSE:RF) shares fell 3.1% Thursday, to $34.44. AmSouth also fell 3.1% , to $28.00.

Kenneth Usdin, an analyst with Banc of America Securities, said there "could be a bloodbath in Alabama" as banks scramble to snap up new business. Among the potential beneficiaries are Alabama-based banks such as Compass Bancshares Inc. (NASDAQ-NMS:CBSS) (CBSS), Colonial Bancgroup Inc. (NYSE:CNB) (CNB) and Alabama National Bancorp (NASDAQ-NMS:ALAB) (ALAB). The share prices of all three banks climbed more than 1% Thursday.

The rising stock prices also could reflect speculation that those banks and other small and mid-sized players in the southeastern U.S. are more likely to become takeover targets as a result of the Regions-AmSouth marriage. Compass, thanks to its presence in hot southwestern markets, regularly appears on larger banks' most-wanted lists, as do First Horizon National Corp. (NYSE:FHN) (FHN) in Tennessee and South Financial Group (NASDAQ-NMS:TSFG) (TSFG) in South Carolina.

But while the $9.8 billion Regions-AmSouth deal is the latest in a string of bank combinations this year, some bankers and others in the industry are downplaying the odds it will set off a wave of deals.

For starters, the three major bank deals this year - Regions-AmSouth, Wachovia's (NYSE:WB) purchase of Golden West Financial Corp. (NYSE:GDW) (GDW) and Capital One Financial Corp.'s (NYSE:COF) (COF) acquisition of North Fork Bancorp (NYSE:NFB) (NFB) - reflect unique circumstances.

With an in-market merger, Regions and AmSouth can achieve extraordinary cost- savings, and Regions' chief executive was looking to wind down his career, according to people familiar with the matter. Golden West's co-CEOs were septuagenarians, and Wachovia (NYSE:WB) craved an entry point into California. Capital One was in the market for a bank with mortgage capabilities as it tries to diversify its consumer-finance businesses.

Those are the sorts of factors that tend to facilitate deals, and they're unlikely to be replicated in many other situations.

"I don't think there's a huge wave coming," said a bank M&A lawyer. "There's lots of demand for consolidation, but lots of deals can't get done" because, as always, the parties can't agree about factors like price and who will run the combined company.

Another major impediment to more takeovers is the wide gulf between the values of large and mid-sized banks, which makes many acquisitions prohibitively expensive. That's especially true of some low-valued midwestern banks - including KeyCorp (KEY) and National City Corp. (NYSE:NCC) (NCC) - that are considered potential buyers of southeastern banks.

Under the merger with Regions, AmSouth shareholders are getting stock that is worth slightly less than what their shares were worth before the deal was announced. Some bankers say the lack of a premium - a so-called "take-under" - will prompt sellers to be less demanding of buyers.

"This certainly is going to cause a lot of people to think about the merits of lower-premium transactions," said a banker who asked for anonymity. Midwestern banks eager to enter the Southeast will now be "sharpening their pencils," he said.

Other observers, however, are skeptical. Announced deals spark speculation, which is good for investment bankers, but most large banks that could be buyers have low price-to-earnings multiples, putting higher-valued smaller banks out of reach.

"Every time there is a deal, people go out and sharpen their pencils," said Richard Barrett, the former head of financial institutions banking at Credit Suisse Group (NYSE:CSR) (CSR). "But there's nothing new in talking about the merits of low- premium deals. Bankers have been doing that for the last 20 years."

-By David Enrich, Dow Jones Newswires; 201-938-2123; david.enrich@dowjones.com

-By Jed Horowitz, Dow Jones Newswires; 201-938-4047; jed.horowitz@dowjones.com

    (END) Dow Jones Newswires   05-25-06 1633   Copyright (c) 2006 Dow Jones & Company, Inc.