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 that more banks will merge to weather the credit crisis.

Banco Itau and Unibanco surged more than 8 percent on the 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. Cyrela Brazil Realty SA Empreendimentos e Participacoes climbed 11 percent, leading a rally in homebuilders after a central bank survey showed interest rates are likely to stay unchanged this year.

``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 2.7 percent to 38,249.44. Mexico's Bolsa advanced 0.8 percent. The BM&FBovespa MidLarge Cap index rose 2.5 percent, while the BM&FBovespa Small Cap index added 2.2 percent. Chile's Ipsa rose 2.8 percent. The MSCI Emerging Markets Index climbed 2.3 percent.

Itau, Brazil's second-biggest non-state bank, jumped 16 percent to 27.09 reais. Unibanco, the third-biggest non-state bank, gained 9 percent to 14.97 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 one 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 4.4 percent to 26.20. Banco Industrial e Comercial SA, the Sao-Paulo based lender that dropped 76 percent this year, rose 2.8 percent to 2.62 reais. Banco Panamericano SA, another lender that fell 69 percent this year, climbed 3.4 percent to 2.78 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.''

Cyrela, the biggest homebuilder, rose 11 percent to 11.80 reais on easing concern higher borrowing costs will slow demand for homes. Gafisa SA rose 9.1 percent to 16.65 reais.

The central bank will keep the benchmark 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.

Geo Gains

In Mexico, homebuilder Corporacion Geo SAB climbed 2.7 percent to 17.99 pesos after JPMorgan Chase & Co. raised its rating to ``overweight'' from ``neutral.'' Mexican homebuilder stocks have fallen to ``attractive'' levels considering that sales are likely to continue rising next year, albeit at a slowing pace than previously thought, analyst Adrian Huerta wrote in a note.

Argentine stocks rallied, led by Banco Macro SA. The fourth- largest private lender rose 15 percent to 3.03 pesos as declining bond yields signaled less restrictive lending conditions.

Peru's Lima General rose 11 percent. Sociedad Minera Cerro Verde, the third-largest copper producer, gained the most in five years in Lima trading after workers called off a strike and the metal's price rebounded. The unit of Freeport-McMoRan Copper & Gold Inc. surged 15 percent to $10.38, the steepest gain since December 2003.

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net; James Attwood in Santiago at jattwood3@bloomberg.net.

Last Updated: November 3, 2008 16:17 EST