By Jeannette Neumann And Patricia Kowsmann

LISBON--Spain's Caixabank SA on Thursday dropped a EUR1.09 billion ($1.24 billion) takeover bid for Banco BPI SA, paving the way for the Portuguese lender to begin talks with peer Banco Comercial Português SA on a possible merger.

The decision by Caixabank, which already owns 44.1% of BPI, represents a big win for Isabel dos Santos, Africa's wealthiest woman and BPI's second-largest shareholder with an 18.6% stake. Ms. dos Santos was against Caixabank's offer from the beginning, and instead urged BPI to consider a merger with BCP, saying that would create a large domestic lender with more value and a diversified shareholder base.

Ms. dos Santos called Caixabank's offer of EUR1.329 a share in cash too low. BPI's board followed, saying the bank was worth at least EUR2.04. Shares of BPI, which were halted from trading early Thursday, last traded at EUR1.26.

Another blow to Caixabank's offer came on Wednesday, when shareholders of BPI rejected the Spanish lender's proposal to lift a 20% voting rights cap. Caixabank said a condition of its takeover bid was that its voting rights become commensurate with its shares in BPI.

In a statement, Caixabank said it would analyze its options regarding its stake in BPI. Analysts have said a sale of Caixabank's stake would help bolster its capital ratio.

Its takeover bid was an attempt to establish a dominant role in banking on the Iberian Peninsula, and came as other domestic Spanish banks had looked abroad to bolster their returns. Banco de Sabadell SA announced a takeover bid of U.K. lender TSB Banking Group PLC in March, as Spain's smaller lenders seek to follow in the footsteps of Spanish banks such as Banco Santander SA, which has a presence in 10 countries and was better able to withstand crisis-era losses.

A merger between BPI and BCP would create a domestic giant, with a market capitalization of EUR6.5 billion and assets of EUR120 billion. BPI is Portugal's No. 4 bank in terms of assets, and BCP is No. 2, after state-owned Caixa Geral de Depositos SA. Both lenders have operations abroad, including in Angola, where BPI controls 50% of Banco de Fomento Angola SA.

Through a spokesman, Ms. dos Santos has said the merger of the two would "bring back a sentiment of ambition to Portugal's financial system," which has been hard hit by a three-year sovereign-debt crisis and the collapse of Banco Espírito Santo SA last year. Caixabank's offer, she said, would make the bank Iberian, but less Portuguese.

BCP, whose largest shareholder is Angola's state oil company Sonangol Group, has said it was "available to analyze" a possible merger if BPI shows interest. A spokesman had no further comments Thursday.

Separately Thursday, Caixabank said it was ending two financial joint ventures with Société Générale SA. Caixabank said it was selling its 20.5% stake in Boursorama to the French bank for EUR218.5 million, as well as its 49% stake in Self Trade Bank for EUR33 million. Caixabank said in a regulatory filing that the two stake sales would raise its "fully loaded" capital ratio by 20 basis points.

Write to Jeannette Neumann at jeannette.neumann@wsj.com and Patricia Kowsmann at patricia.kowsmann@wsj.com

Access Investor Kit for CaixaBank SA

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=ES0140609019

Access Investor Kit for Banco Comercial Português SA

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=PTBCP0AM0007

Access Investor Kit for Banco BPI SA

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=PTBPI0AM0004

Access Investor Kit for Banco Comercial Português SA

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US0594797096

Access Investor Kit for CaixaBank SA

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US12803K1097

Subscribe to WSJ: http://online.wsj.com?mod=djnwires