TOKYO (AP) _ Asahi Bank said Thursday that it is pulling out of a merger that would have created Japan's second-largest banking group, saying it wants to pursue its own regional strategy.

The announcement came just three months after Asahi, Sanwa Bank and Tokai Bank announced plans to join forces, saying they would set up a joint holding company in April 2001 and reorganize their retail, international and other operations.

Asahi stepped back from the deal at a time when the Japanese banking industry is plunging into mega-mergers in an attempt to become more competitive internationally. The government, meanwhile, is gradually deregulating the financial industry.

The country's largest lenders are consolidating as they struggle to dispose of colossal bad loans from a speculative lending boom in the late 1980s and early 1990s.

Asahi said in a statement that it decided to ``put off'' participating in the merger with Sanwa and Tokai after ``differences of opinion'' arose over their business models.

The other two banks said in a statement that they will press ahead with plans to form a holding company by 2001, and may merge by 2002.

Tokyo-based Asahi said it plans to pursue a ``multi-regional bank'' strategy, expanding loans to homeowners and other retail banking services in the metropolitan area.

``We have to create a new model for growth ourselves,'' President Tatsuro Ito said.

Analysts and media reports said that Asahi's management was concerned that Sanwa would dominate the new bank.

Osaka-based Sanwa is Japan's fourth-largest lender with $424 billion in assets. Asahi's $264 billion in assets rank it No. 9 among the country's nationwide banks, just behind Nagoya-based Tokai.

Sanwa was a latecomer to the merger talks. Asahi and Tokai announced plans for an alliance in October 1998.

But Asahi's withdrawal may not necessarily hurt the other two banks.

The assumption that fewer assets mean the new bank will be less competitive is outdated, said Yoshinobu Yamada, a banking analyst at Merrill Lynch in Tokyo.

``Asahi's decision to go its own way will speed up the integration between the other two banks and clarify their strategy, which until now has wavered between a universal and regional approach,'' he said Thursday.

Leading the Japanese bank consolidation rush, Fuji Bank Ltd., Dai-Ichi Kangyo Bank Ltd. and the Industrial Bank of Japan Ltd. plan to merge this fall as the Mizuho Financial Group.

It will become the world's biggest bank, ahead of a new institution to be formed in July by Deutsche Bank and Dresdner Bank.

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On the Net:

Sanwa Bank Ltd: http://www.sanwabank.co.jp/english/index.html

Tokai Bank Ltd: http://www.csweb.co.jp/TBK/tkbehom2.htm

Asashi Bank Ltd.: http://www.asahibank.co.jp/ENGLISH/index.html