Italian bank Banco BPM said it dropped out of talks to merge with peer Banca Monte dei Paschi di Siena, in a move that could clear the way for a rival $35 billion takeover offer from Intesa Sanpaolo.

BPM said Friday that conditions for reaching an agreement with Monte dei Paschi hadn't been met nearly two months after it sent its proposal, and that its board decided to discontinue discussions regarding a potential combination. The bank said it still saw strong potential strategic and industrial rationale for a tie-up, and that a deal would have generated significant value for both parties.

Monte dei Paschi acknowledged the move and said it remained focused on the implementation of its business plan and the integration of recently acquired Mediobanca, while continuing to evaluate any strategic option in the interest of its shareholders.

Italian lenders have stepped up dealmaking activity in recent years, placing the country at the center of attempts to consolidate Europe's banking industry. Monte dei Paschi last year bought Mediobanca, while UniCredit--which is nearly two years into an effort to take over Germany's Commerzbank--first proposed to buy BPM and later withdrew its bid.

Monte dei Paschi, widely considered the world's oldest bank still in operation, in June became the target of two approaches--a cash-and-stock bid from Intesa and merger proposal from BPM. Intesa moved swiftly to formalize its offer, while BPM said its approached aimed to open discussions between the two banks.

In its preliminary assessments of both proposals, Monte dei Paschi's board raised concerns about the price offered by Intesa and flagged other risks, but said it intended to continue to assess BPM's proposal.

BPM's decision to pull out came after its largest shareholder, France's Credit Agricole, expressed doubts about the merits of a tie-up between BPM and Monte dei Paschi. Credit Agricole holds a 29.3% stake in BPM.

Credit Agricole Chief Executive Olivier Gavalda said during an earnings call on Friday that it was difficult to see how a combination between Monte dei Paschi and BPM could create value for BPM shareholders. A preferred scenario for Credit Agricole would be a merger between its Italian business and BPM, Credit Agricole Chief Financial Officer Clotilde L'Angevin said.

Meanwhile, Intesa Chief Executive Carlo Messina said last week that his bank's offer for Monte dei Paschi was well on track.