LONDON (Reuters) -- The world's largest financial company Citigroup moved yesterday to boost its investment bank Salomon Smith Barney into Europe's top ten, buying the investment banking division of Britain's Schroders Plc for 1.35 billion ( $2.21 billion).

Salomon Smith Barney, currently 12th in the European merger and acquisition league tables, and the 15th ranked Schroders, advised on a total of $143 billion worth of deals in 1999.

Both have struggled to compete against the bigger houses in the last year as the top ten have carved up an increasing share of the booming European M&A advisory market.

The combination of the two would catapault them past banks like Warburg Dillon Read and Lehman Brothers up to number seven and into a position to compete with the likes of Goldman Sachs and Morgan Stanley Dean Witter.

John Reed and Sanford Weill, joint Chairmen and Co-Chief Executives Officers at Citigroup, said the creation of Schroders Salomon Smith Barney in Europe marked an important extension of their group's activities.

"It doubles our investment banking platform in Europe and gets us to where we want to be in that important region several years ahead of schedule,'' they said in a statement.

The deal is expected to be accretive to Citigroup's earnings per share from revenue enhancements and operating efficiencies.

`Will continue to operate Bda company' The half family-owned Schroders said it had decided to focus on asset management and private banking and would use the proceeds from the investment banking sale to boost these areas. Schroders Plc said in a separate statement that it will continue to operate its Bermuda company, which employs 31 and operates from Church Street offices. "Schroders (Bermuda) Ltd. will continue to build its business focusing on investment management and private equity management,'' the statement said. Schroders Plc, which has been linked in the past with Goldman Sachs, has struggled in recent years to compete with the aggressive US investment banks, particularly in Europe where the creation of the euro has triggered huge merger activity.

Schroders' share price surged as much as 24 percent to 14.65 just before the announcement on the speculation of a full takeover, but closed back at 13.14 as the news of a partial sale was digested.

Citgroup's shares were down 5/8 at $57-11/16 by 1810 GMT.

A total of around 900 million or 300 pence cash per share will be paid directly to Schroders shareholders.

An equity alternative in Citigroup stock will also be available for up to 50 percent of this amount. The deal is to be completed by May this year.

The balance of proceeds from the deal of about 450 million pounds would be used to develop Schroders' existing fund management and develop two new businesses.

Schroders said it also planned an aggressive expansion into private banking in Europe and Asia and would set up a hedge funds operation as well.

"The increased resources realised within Schroders Plc will be applied to the development of the asset management business and to enable shareholders to realise part of their investment in the group,'' Schroders said.

It said it expected to spend substantially less than 110 million pounds to boost its asset management operations and create the hedge funds and private banking units.

The remainder would set aside as equity capital to back the funds management operation.

Schroders Chairman Win Bischoff noted, however, that the new growth would be organic and the group did not plan a "massive programme of hirings.''