By Celine Aswad

DUBAI, April 26 (Reuters) - Two Saudi banks soared on Wednesday after saying they were in initial stages of a merger, helping lift the mood in other lenders while first quarter financial results buoyed the shares of two blue chips in other Gulf countries.

On Wednesday Saudi's Alawwal Bank 1040.SE agreed to start talks with Saudi British Bank 1060.SE (SABB) about a tie-up that could create the kingdom's third biggest bank with assets of nearly $80 billion.

Shares in Alawwal soared by 8.6 percent in their heaviest daily traded volume since May 2012 while SABB jumped 6.8 percent in the largest single day volume since November last year.

"While the merger, if it goes through, is good news for both lenders, Alawwal will benefit more from the tie up from reduced operating cost," said Mohammad al Shammasi, chief executive of Riyadh based Derayah Financials.

Other analysts said that currently the price-to-book ratio of both lenders, a common measure used to determine the relative value of banks, is low and that a merger will help drive up the value of the combined entity.

The positive mood spilled into other baking shares, with mid-sized Saudi Investment Bank 1030.se gaining 2.0 percent.

Yanbu National Petrochemical 2290.SE (Yansab), however, dropped 4.3 percent to 55.75 riyals after reporting a net income of 608 million riyals ($162.1 million), below the average forecast of three analysts of 635.82 million riyals, and up 44.2 percent from the prior year period.

"We believe lower than expected operating rates and higher operating expenses were offset by gross margin expansion. Operating rates... lower than our estimate mainly due to preparation for shutdown in second quarter of 2017," said a note by Riyadh-based NCB Capital.

Improving petrochemical prices, strong balance sheet and an attractive dividend yield of around 5 percent are the key strengths of the stocks, NCB Capital added that rates the stock an "overweight" with a target price of 50.40 riayals.

Most other petrochemical producers have not yet reported earnings as authorities have granted companies an additional 15 days to report earnings since they are converting to IFRS accounting standards from the local standard.

The Saudi index .TASI closed flat.

Elsewhere, shares of the largest listed company, telecommunications operator Etisalat ETEL.AD , added 1.1 percent after it reported a 4.5 percent rise in first-quarter net income from the prior year period to 2.09 billion dirhams, broadly in line with analysts' forecast.

The Abu Dhabi index .ADI , however, lost 0.5 percent with main drag from profit taking on shares of the largest lender First Abu Dhabi Bank NBAD.AD which dropped 2.2 percent.

Shares of energy company Abu Dhabi National Energy TAQA.AD , which had dropped as much as 6.7 percent earlier in the day on news that rating agency S&P had downgraded TAQA's credit rating to 'A-' from 'A' and gave it a 'negative' outlook from 'stable', closed flat.

S&P said the downgrade came as a result of "recent related-party transactions at TAQA" which raises "potential risks to our view of the level of government support".

Earlier this month state owned utility company, Adewa, increased its stake in loss-making TAQA, days after it granted the energy company land valued at 18.7 billion dirhams ($5.1 billion).

In Dubai, 26 shares rose, nine declined and the index .DFMGI added 0.2 percent. Financially troubled builders Arbatec ARTC.DU and Drake & Scull DSI.DU were some of the top gainers with the former adding 4.2 percent and the latter jumping 2.1 percent.

The largest listed developer, Emaar Properties EMAR.DU , however, fell 0.6 percent as its shares traded ex-dividend on Wednesday.

Shares of Qatar's largest petrochemicals maker Industries Qatar IQCD.QA rose 1.2 percent after reporting a first quarter net profit of 928 million Qatar riyals, up 33 percent from the prior year period and above the 866.25 million riyals three analysts had on average forecast the industrial company to make in the period.

The company attributed the rise in profit to higher product prices and improved operating costs.

Doha's index .QSI rose 0.5 percent, coming slightly off the previous session's four-month low.

Egypt's index .EGX30 , which was shut for a holiday on Tuesday, added 0.7 percent, taking cues from other emerging markets. The MSCI Emerging Market index .MSCIEF , of which some Egyptian share are constituents of, was trading near levels last hit in June 2015.

Global Telecom Holding GTHE.CA , a stock which is a member of MSCI emerging market index, jumped 4.3 percent. A fellow member real estate developer Talaat Mostafa Group TMGH.CA added 1.9 percent.



WEDNESDAY'S HIGHLIGHTS



SAUDI ARABIA



* The index .TASI added 0.02 percent to 6,917 points.



DUBAI



* The index .DFMGI added 0.2 percent to 3,439 points.



ABU DHABI



* The index .ADI fell 0.5 percent to 4,541 points.



QATAR



* The index .QSI rose 0.5 percent to 10,206 points.



KUWAIT



* The index .KWSE added 0.3 percent to 6,854 points.



BAHRAIN



* The index .BAX lost 0.2 percent at 1,334 points.

OMAN



* The index .MSI climbed 0.8 percent to 5,510 points. (Editing by Toby Chopra) ((celine.aswad@thomsonreuters.com)(+9715 6224 7653)(Reuters Messaging: celine.aswad.thomsonreuters.com@reuters.net))