Commerzbank's management has warned the German government that a potential multibillion euro merger with Italy's second-largest bank UniCredit is a threat to businesses that make up the backbone of Europe's biggest economy, the Financial Times reported on Monday.

Earlier this month, UniCredit took a 9% stake in Commerzbank, catching German authorities off guard. The Italian takeover interest has prompted a backlash.

UniCredit's swoop is the most ambitious attempt yet at a pan-European bank merger, but faces considerable political hurdles in Germany.

Executives at the German bank say a tie-up with UniCredit could hobble lending to small and medium-sized German companies that play an important role in the economy, the Financial Times reported, citing people with knowledge of internal discussions.

After a merger, lending decisions and risk management capabilities may be moved abroad, undermining services to domestic clients that have been banking with Commerzbank for decades, the report added.

Commerzbank executives told the FT that a potential "Italy first" approach by UniCredit in times of financial stress could put German clients at a disadvantage and hurt the wider economy.

UniCredit told the FT that these arguments misrepresented the group's inner workings, adding that it is a "pan-European" bank with "full self-standing legal entities" in all markets.

The German government could not immediately be reached for comment while UniCredit and Commerzbank did not immediately respond to requests for comment.

  - Reuters