The move is part of a broader restructuring of Spain's fragile financial system, which has been hit hard by the collapse of the property market in 2008. The government is pushing for mergers and takeovers to create fewer, but sturdier, banks.
Santander's fusion, to be completed next May, will save money through the integration of services and the closure of 700 branches, Santander said in a statement. It said it would reduce staff gradually but gave no figures as to how many people it would let go.
Banco Santander S.A. owns some 90 percent of Banesto, once one of Spain's top banks. It acquired it in 1994, a year after it was taken over by the central bank after an audit revealed a massive shortfall of capital.
Santander acquired the private bank Banif after it merged with Banco Central Hispano in 1999.
It said the Santander brand would now have 4,000 offices in Spain and some 14,000 worldwide.
Trading of shares in Santander was suspended temporarily until the decision was announced. Santander's share price closed Friday at
euro5.90 while Banesto's stood at euro2.99.