Oct. 21 (Bloomberg) -- KeyCorp, U.S. Bancorp, Regions Financial Corp., and National City Corp. may seek to join a $250 billion government plan to recapitalize banks and are pondering whether to use the money to make acquisitions, a step backed by U.S. Treasury Secretary Henry Paulson.

Regions, Alabama's biggest bank, said it will raise as much as $3.5 billion by selling a stake to the government. KeyCorp, the No. 3 Ohio lender, will seek between $1.1 billion and $3.3 billion, while bigger rival National City also mulls a stock sale. Some cash may finance takeovers, the bankers said today.

``I'm telegraphing that we're more active and more interested than we might have been before'' on acquisitions, U.S. Bancorp Chief Executive Officer Richard Davis said on a conference call. Government money may be ``quite attractive,'' said the 50-year-old CEO of Minnesota's biggest bank.

Davis and his counterparts are laying plans as they report dismal third-quarter earnings, evidence the credit squeeze continues to hamper profit. U.S. Bancorp's third-quarter profit fell 47 percent, and net income skidded 80 percent at Regions. Both KeyCorp and National City had losses in the period.

Paulson told PBS television's Charlie Rose today that mergers and acquisitions will strengthen the banking industry, while reiterating that the bank recapitalization plan aims to stimulate lending.

`Some Consolidation'

While the Treasury is ``not going to use this money to prop up failing banks,'' there will be ``some consolidation,'' the Treasury chief said. As an example, he cited Wells Fargo & Co.'s planned acquisition of Wachovia Corp. as a combination that's a ``very good thing for the system.''

Lenders that are approved by the government can use federal money to increase lending, acquire other banks, or raise additional capital from the private sector, said William Sweet, a partner in the Washington office of law firm Skadden, Arps, Slate, Meagher & Flom LLP.

``There's no specific limit on the actual use of the funds,'' said Sweet, who focuses on financial institutions. ``Those institutions that have the management and resources and inclination to leverage the government money by fixing other problems will find it easier to attract the investment than those without a plan.''

Bank deals have also been aided by an Internal Revenue Service ruling that allows an acquiring bank to take a tax deduction on loan losses and bad debt at its target.

Job Cuts

At National City, which today announced plans to cut 4,000 jobs, CEO Peter Raskind said he's ``quite interested'' in the government's proposal. ``I don't think we were in a position of needing more capital'' before the bailout was proposed, he said. ``We're in analysis mode.''

KeyCorp's board will discuss the potential capital infusion during the next week, CEO Henry Meyer said today on a conference call to discuss the Cleveland lender's second straight unprofitable quarter. Fresh capital ``would allow us additional capacity for loan growth for our relationship customers, and be good for the economy,'' said Meyer, a 35-year industry veteran.

M&T Bank Corp. Chief Financial Officer Rene Jones said today the environment for mergers was ``right'' and that ``if something comes up, we're ready,'' for an acquisition. The Buffalo, New York-based lender, whose No. 2 shareholder is Warren Buffett's Berkshire Hathaway Inc., today reported a 54 percent decline in quarterly net income.

PNC Financial Services Group Inc., Marshall & Isley Corp. and BB&T Corp. said last week that they were considering selling shares to the government. Firms have until Nov. 14 to apply to the program.

Paulson's Plan

Under Paulson's plan, the Treasury will buy preferred stock from banks that pays 5 percent annually for the first five years, and then rises to 9 percent. The government expects in return that banks will make more loans, said Assistant U.S. Treasury Secretary David Nason.

Banks may also have the option of selling assets to the government as part of its original plan to take illiquid positions off of their books. Paulson still has about $450 billion to deploy as part of the bailout package.

JPMorgan CEO Jamie Dimon, whose firm has already been tapped to receive a $25 billion infusion, said Oct. 15 he ``would be willing to use it for anything that made sense for JPMorgan shareholders'' including acquisitions.

KeyCorp rose 12 percent to $10.95 at 4:15 p.m. in New York Stock Exchange composite trading, while Regions gained 6.1 percent to $11.29. National City advanced 2.4 percent to $2.99 and U.S. Bancorp fell 92 cents to $30.20.

To contact the reporter on this story: Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: October 21, 2008 17:11 EDT