Nov. 3 (Bloomberg) -- Brazilian stocks rose to the highest in two weeks after Banco Itau Holding Financeira SA agreed to acquire Uniao de Bancos Brasileiros SA, increasing speculation of more bank mergers to overcome the credit crisis.

Banco Itau and Unibanco surged more than 10 percent on a merger that will create the nation's largest bank with 575 billion reais ($261.4 billion) in assets. Banks gained on speculation Banco Bradesco SA, the biggest private bank, will buy other financial companies to stay competitive. Gafisa SA led a rally in homebuilders after a central bank survey showed interest rates are likely to stay unchanged this year, instead of the revious forecast of a half-percentage point increase by yearend.

``The fact that they are paying a premium for Unibanco throws out the worry that Unibanco was in trouble,'' said Carlos Camacho, who helps manage the equivalent of $2.5 billion in assets at GAP asset Management in Rio de Janeiro. ``This creates a strong institution, I think it's excellent. Now, Bradesco must be looking at other institutions and they are really trading at discounts.''

The Bovespa gained 2.5 percent to 38,197.50 at 9:16 a.m. New York time. Mexico's Bolsa climbed 1 percent. Chile's Ipsa rose 1.9 percent. The MSCI Emerging Markets Index rose 2.2 percent.

Itau, Brazil's second-biggest non-state bank, jumped 18 percent to 27.45 reais. Unibanco, the third-biggest non-state bank, gained 11 percent to 15.20 reais. The transaction may signal that Brazilian financial institutions will have to consolidate to ride out the global financial crisis. The accord follows 15 months of negotiations between Itau and Unibanco.

``It's an enormous surprise and will create a very strong number 1 player in the banking sector,'' Urban Larson, Latin America portfolio manager at F&C Management Ltd. in London, which oversees about $2.5 billion in stocks.

Bradesco Speculation

Bradesco jumped 6.4 percent to 26.70. Banco Industrial e Comercial SA, the Sao-Paulo based lender that dropped 72 percent this year, rose 5.9 percent to 2.70 reais. Banco Panamericano SA, another lender that fell 68 percent this year, climbed 4.1 percent to 2.8 reais.

``Investors are speculating that Bradesco will begin a buying spree in a bid to increase assets and reduce the gap in size after Itau and Unibanco merger,'' said Catarina Pedrosa, head of equity research at Banif SA. ``Those middle-sized banks are the only assets left for grabs as the biggest firms have gone through consolidation already.''

Gafisa rose 6.5 percent to 16.25 reais, leading a rally in homebuilders on easing concern higher borrowing costs will slow demand for homes. Cyrela Brazil Realty SA Empreendimentos e Participacoes, the biggest homebuilder, rose 7.3 percent to 11.37 reais.

The central bank will keep the benchmark interest rate unchanged at 13.75 percent by the end of this year, compared with a previous forecast of 14.25 percent, according to the survey, which was taken Oct. 31 and published today. Policy makers will cut the benchmark rate to 13.38 percent by the end of 2009, compared with a forecast of 13.5 percent last week, according to the survey.

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net.

Last Updated: November 3, 2008 09:49 EST