PARIS (Reuters) - The French government on Saturday gave its blessing to a merger of state-controlled Gaz de France and private utility group Suez, which would create an all-French gas giant to fend off a looming bid for Suez by Italy's Enel.

Banking sources said the merger announcement would come as soon as Monday and take the form of a share bid by Suez for Gaz de France, perhaps enhanced with some cash.

France's center-right government, which is flying the flag of "economic patriotism" at a time of increasing globalization, risks angering the European Commission and World Trade Organization because of concerns that its action goes against the spirit of free movement of capital.

Speaking at his central Paris office, in the presence of his finance minister and the chief executives of the two companies, Prime Minister Dominique de Villepin said the merger was important to safeguard France's independence in energy supplies.

He said the energy market in Europe was changing rapidly, and it was up to the government to guarantee France's investment capacity and production capabilities.

"The independence of our country for energy supplies is of strategic importance for France... The merger of Gaz de France and Suez seems the most appropriate solution," he said in a brief statement.

Villepin said Finance Minister Thierry Breton would start the necessary consultations with parliament and others on Monday, and that it was up to the companies involved to agree the terms of the merger. France needs to change the law in order for the state to own less than 70 percent of Gaz de France.

Suez owns Belgium's Electrabel utility, and the chief executive of Italy's Enel said on Wednesday the company was interested in Electrabel and did not exclude a bid for parent Suez. Enel had no immediate comment.

Villepin said the two companies had been discussing a tie-up for several months and the project also had the support of the Belgian government.

"With this merger, we aim to create one of the world's leading energy companies, in particular in the gas sector -- in particular it will be the biggest actor on the market for liquefied natural gas (LNG)," Villepin said.

"It will give France a second big energy player next to EDF and reinforces the global industrial calling of our country," he added.

Gaz de France has a market capitalization of 29.3 billion euros and Suez's market value is 43 billion euros.

Their combined 72.3 billion euros puts Enel's 44 billion in the shadow and surpasses E.ON of Germany, which is Europe's second-biggest listed group with 65.6 billion behind EDF's 80 billion.

The history of Suez goes back to the company that built the Suez channel in Egypt, and it is now a leading utility firm in France, Belgium and elsewhere.

Villepin's announcement came after a dramatic week for Europe's utility industry, involving strategic takeover maneuvers centered around Endesa in Spain.

Enel confirmed on Saturday it was interested in Electrabel and said it was considering growth opportunities in other countries including Spain, France and Eastern Europe.

On Friday Suez workers, who own about 3.35 percent of the company, came out in support of closer ties with GDF, saying they opposed any "unfriendly" takeover by Enel.

"The representatives of Suez's workers declare their absolute hostility to an unfriendly offer by Enel," the works council said in a statement. "They support and would prefer a reinforcement of ongoing cooperation with Gaz de France."

And Belgian holding company GBL, a key shareholder Suez controlled by the Frere and Desmarais families, said it would favor closer links between Suez and Gaz de France, and was also opposed to any bid from Italy's Enel.

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