By Matt Scuffham and John Tilak

TORONTO (Reuters) - Canadian Imperial Bank of Commerce said it will buy Chicago-based PrivateBancorp Inc in a $3.8 billion cash-and-share deal, its biggest ever acquisition and a long-awaited expansion in U.S wealth management.

CIBC has been in talks with potential U.S. targets for some time as it looked to expand its wealth management business. The bank sees the sector as a growth area that could help offset sluggish domestic growth and a low-interest-rate environment.

Some investors are also keen for Canadian banks to lessen their dependence on a domestic market that has been hurt by the prolonged slump in oil prices.

"What we're trying to achieve for our shareholders and for our clients is to have a business with a more diversified earnings stream than just relying largely on the Canadian market," CIBC Chief Executive Officer Victor Dodig said on a conference call.

Dodig said the combination with PrivateBancorp will enable CIBC's U.S. banking business to contribute more than 10 percent of the bank's net income over time, double the 5 percent the U.S. market now contributes.

Chief Financial Officer Kevin Glass said the deal would not reduce the bank's investment in Canada or its target to maintain its dividend payout at the top end of a target range of between 40 to 50 percent of earnings.

He also said that, after closing the deal, CIBC's core tier 1 capital ratio, a key measure of its financial strength, would remain above 10 percent.

CIBC's stock was down 3.1 percent in early trade, while shares in PrivateBancorp were up 22.4 percent to $43.99, below the $47 dollar value of the deal based on Monday's closing CIBC share price. This reflected the market's expectation that the price of CIBC shares would fall following the deal, given the strain it puts on CIBC's capital strength and earnings in the short term.

"The acquisition is sizeable but the bank has been quite clear with its intentions and despite being somewhat pricey and likely near-term dilutive to earnings it should not be shocking to the market," Barclays analyst John Aiken wrote in a research note.

David Neuhauser, managing director at Livermore Partners, which owns shares of PrivateBancorp, said it was a good deal for the U.S. bank.

"PrivateBancorp was reaching an inflection point where it was going to be harder for them to continue to grow their assets in the U.S. unless they were on the acquisition trail. It was ripe for consolidation," he said.

Barry Schwartz, portfolio manager at Baskin Financial Services, said Canadian banks need to reduce exposure to the Canadian economy and may have had to pay a full price to do that.

"CIBC had no choice. They are looking for growth and growth doesn't come cheap," he said.

Dodig said he had been working on the deal with his counterpart at PrivateBancorp, Larry Richman, for six to eight months. Richman will remain CEO of PrivateBancorp and become head of CIBC's U.S. operations.

(Additional reporting by Amrutha Gayathri and Nikhil Subba in Bengaluru; Editing by David Gregorio)