By Marcin Goclowski

WARSAW (Reuters) - Poland's Bank Zachodni WBK agreed on Thursday to buy local assets from Deutsche Bank for 1.29 billion zlotys (£269.9 million) to close the gap on the country's No.2 lender Bank Pekao.

In November, sources familiar with the matter told Reuters the euro zone's biggest bank Santander - which owns BZ WBK - was in exclusive talks to buy the bulk of Deutsche Bank's business in Poland.

BZ WBK said on Thursday it had agreed to buy the German bank's Polish retail business, excluding its foreign currency credit portfolio. It is also buying Deutsche's local private banking, small and medium enterprises units and a brokerage.

The price equates to 0.6 times book value, about half the average of the banking sector in Poland.

At 1120 GMT, BZ WBK shares were up 4.3 percent, outperforming the local market.

The deal will boost the assets of BZ WBK, Poland's third-biggest bank, by almost 20 billion zloty to 169 billion, leaving it just 2 billion behind Bank Pekao.

BZ WBK CEO Michal Gajewski declined to say whether the bank expected to overtake Pekao in 2018.

"Everything hinges on the market opportunity. We're the organisation that both globally and locally has the biggest experience regarding such deals," he told a news conference when asked whether the bank could make another takeover next year.

BZ WBK will pay 80 percent of the agreed price in shares, with the rest in cash. It will issue 2.75 million new shares to Deutsche Bank, according to the agreement, equivalent to 2.7 percent of BZ WBK shares.

The transaction is expected to close by the end of 2018, and will boost BZ WBK's position servicing wealthy clients.

The transaction follows a string of bank mergers and acquisitions in Poland driven by tough competition, low interest rates and efforts by the country's ruling Law and Justice (PiS) party to curb what it sees as excessive foreign ownership.

In June, Polish state-controlled insurer PZU and investment fund PFR bought a 33 percent stake in UniCredit's Bank Pekao.

Poland accounted for 3 percent of Santander's underlying third-quarter profit.

(Reporting by Marcin Goclowski; Editing by Mark Potter)