In the ruling, the Federal Reserve Board of Governors rejected City Bank claims that combining the state's fourth- and fifth-largest financial institutions would hurt competition and consumer convenience.

The Fed's OK removes a potential stumbling block to Central Pacific's hostile takeover bid, which was made in April and still faces a state regulatory ruling expected by Feb. 18, as well as opposition by City Bank's board of directors and many shareholders.

Clint Arnoldus, Central Pacific chief executive officer, said the bank was extremely pleased to see the merger move forward.

"In essence, this approval provides independent, objective support for our view that this combination would not create management, anti-competitive, antitrust or other concerns," he said. "We believe that combining the best of both our banks will create a stronger, Hawai'i-based bank focused on our community needs."

Wayne Miyao, City Bank senior vice president and spokesman, said the bank intended to appeal the ruling. "We believe the Federal Reserve's ability to assess the reality of the situation half-way around the world is limited," he said.

Miyao characterized the ruling as "highly conditional."

In its 35-page order, the Reserve Board conditioned its approval on Central Pacific not changing the terms of its offer, and consummating the acquisition within three months.

The board said the deadline was a standard timetable that it would expect to extend as long as competition, customer service and other statutory considerations continued to be met.

But the board also said it recognized from previous cases that a prolonged contest for ownership might have an adverse effect on a banking institution's finances, managerial resources and other factors considered by the board.

The ruling was not a recommendation on whether the proposed transaction is in the best interests of shareholders or whether it should be accepted by City Bank management.

Central Pacific is offering to pay $22.27 and 1.6005 shares of Central Pacific stock for each share of CB Bancshares, a 35 percent cash plus 65 percent stock deal valued at about $300 million.