Updated from 10:46 a.m. EST


, Europe's largest municipal lender, has agreed to acquire

Financial Security Assurance Holdings

( FSA), the New York-based bond insurer, for about $2.6 billion in cash.

The deal will expand Dexia's presence in the U.S. and enable FSA to access the European market.

Under the terms of the agreement, Dexia will pay $76 for each share of FSA. That's a 32% premium over FSA's closing price Monday of 57 11/16. But more significantly the price is a 70% premium to the stock's closing price of 44 3/4 on March 8. That was a day before the stock began to trade erratically on news of an impending takeover and closed up 31% at 58 9/16 on March 9.

In Tuesday midday trade, FSA was up 13 11/16, or 24%, to 71 3/8. Dexia, based in Brussels and Paris, closed Tuesday trading on the Paris bourse up 5.70 euros, or 4%, to 137.10 euros.

"The major growth engine in this business is outside the U.S.," said analyst Robert Ryan of

Banc of America Securities

. "To hear of a transaction that brings partnerships in Europe is logical." He rates FSA a buy,

Banc of America's

second-highest rating, and his firm has done no underwriting for the company.

Dexia operates through

Credit Local de France

, which specializes in lending to local authorities and public sector project finance;

Credit Communal de Belgique

, a Belgian retail bank; and

Banque Internationale a Luxembourg

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, which operates asset management, private banking and fund administration activities.

When talk surfaced of a takeover last week, "you wouldn't have put Dexia on the list of potential acquirers because there really wasn't a well-known interest on the part of Dexia in financial guarantees," Ryan commented. "It's more of a lender."

Some had speculated that the potential buyer would be

XL Capital

(XL) - Get Report

, which set up two joint ventures with FSA in November 1998. Those joint ventures were "fueled by an increasing push towards international bond assurance," Ryan added.

FSA guarantees principal and interest on municipal bonds and asset-backed securities. After the deal is completed, FSA's claims-paying ability will continued to be rated Triple-A by

Fitch IBCA


Moody's Investors Service


Standard and Poor's Ratings Services


Japan Rating and Investment Information


The transaction has been approved by the boards of both companies and is expected to close in the second quarter.

Lazard Freres

acted as financial advisor to Dexia and

Goldman, Sachs

did the same for FSA.