Oman has temporarily halted a merger between HSBC's operations in the country and Oman International Bank due to a lawsuit against the British lender, a source familiar with the matter said on Thursday.

HSBC, Europe's biggest bank, said in April it will merge its Omani business with OIB and retain a 51-percent stake in the enlarged operation.

Oman's Ministry of Commerce and Industry issued an order  temporarily suspending the merger until the lawsuit filed by  businessman is settled or withdrawn, local newspaper Times of Oman, reported earlier on Thursday.

The businessman has a compensation claim of 2 million rials ($5.20 million) against the bank, according to the newspaper, and filed an objection with the ministry, citing the ongoing legal case.

"Any objection in Oman has to be heard by the court for validity. That's the reason the ministry issued a temporary halt," the source said, speaking on condition of anonymity. HSBC declined to comment.

OIB is Oman's fifth-largest bank, with the second-largest branch network in the country and gross assets of $3.2 billion.

The merger was slated to close in the second quarter and HSBC was planning to inject additional capital of up to $97.4 million from internal resources into HSBC Oman, as part of the deal.

HSBC is pulling back from countries where it is unprofitable or lacks scale, and restructuring operations elsewhere, and has been reviewing its Middle Eastern operations.  - Reuters