Europe needs truly continental banks to operate effectively, European Central Bank President Christine Lagarde said on Wednesday, as Germany's Commerzbank tries to fight off a potential takeover attempt by Italy's UniCredit.

"Reducing the ring-fencing of capital and liquidity along national lines would allow funds to flow freely within banking groups and facilitate lending across borders," Lagarde said about integration, without naming any particular lenders.

"Truly European banks can effectively diversify their risks across sectors and regions," she said. "They have the capacity to lend more at scale and thus handle cross-border financing projects that smaller locally focused banks cannot."

(Reporting by Balazs Koranyi Editing by Mark Potter)