Wall Street and the banking industry awoke Wednesday to a more competitive world with the birth of a new financial services behemoth.

Travelers Group announced a $9 billion deal for Salomon Inc., capping a week of takeover speculation that had previously focused on Bankers Trust New York Corp. and J.P. Morgan & Co.

The deal would bring together Travelers' Smith Barney Holdings Inc.-the nation's second-largest retail brokerage-and Salomon Brothers, one of Wall Street's older investment banks.

Observers said the deal, coming on the heels of the Morgan Stanley-Dean Witter merger in June, marks the emergence of a new model for financial services companies. And that raises the stakes for commercial banks.

"It's the first step toward really completing the financial supermarket," said Linda Chase, a consultant with New York-based Towers Perrin. "Banks can't possibly compete" with such a broad-based rival "if that's the way the industry is heading," she said.

The deal, which is slated to close by yearend, was the buzz of the financial services industry Wednesday. In recent months, insurance companies, brokerage firms, and commercial and investment banks have been pairing off in hitherto unseen combinations. The vision of a truly integrated financial services industry-which has gone in and out of fashion before-is clearly back in vogue.

But observers said the new wave of mergers will have to play out for some time before it is clear which combinations work.

"If one follows the trends over the last 50 years, there will be some spectacular successes with a few embarrassing failures," said Richard Hartnack, vice chairman of Union Bank of California, Los Angeles, a subsidiary of Bank of Tokyo-Mitsubishi Ltd.

He pointed to the collapse of Sears Roebuck's much-vaunted acquisition of Dean Witter in 1981. "Stocks and socks" seemed like a great idea, Mr. Hartnack said. "Bankers were quaking in their boots, and a couple of years later it had to be unwound." Sears sold Dean Witter in 19tk.

Although the Smith Barney brokerage is a prominent part of Travelers, the company's roots are in the insurance business. It recently expanded its huge property and casualty operation by buying a major unit of Aetna.

The Travelers-Salomon merger raises no novel policy questions; insurance companies have bought securities firms before. But it is sure to attract attention in Congress, where lawmakers have struggled for years to enact financial reform.

"It sends yet another message that different parts of the financial industry are consolidating," said John C. Dugan, a former Treasury Department lobbyist who is a partner in the Covington & Burling law firm. "It is creating a different marketplace that sooner or later Congress is going to have to respond to."

"This is more evidence from the real world that we need action on financial modernization," said Rep. Marge Roukema, R-N.J., chairwoman of House Banking's financial institutions subcommittee.

"We can't be standing here and letting the financial services industry grow out of control without statutory requirements that define how mergers take place and what consumer protections are necessary and that ensure safety and soundness," Rep. Roukema said.

But others said they don't expect financial services firms to wait for Congress to decide how to shape the industry.

Travelers' deal for Salomon "is just a perfect example of consolidation, and it will be a catalyst for banks to step up to the plate," said a hedge fund manager, who asked not to be identified.

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