Spain looks at possible merger of Bankia and Banco Mare Nostrum

MADRID (Reuters) - Spain's bank rescue fund said on Wednesday it would look into a merger between state-owned banks Bankia (BKIA.MC) and Banco Mare Nostrum (BMN) that would potentially create a new entity with total assets of over 240 billion euros (£206 billion).

The Spanish state owns a 65 percent stake in both Bankia and BMN following a 24-billion-euro bailout at the height of the euro zone debt crisis.

In a filing to Spain's market regulator, the FROB said it had agreed to put in place the measures necessary to analyse giving the green light to a merger between Bankia, Spain's fourth largest bank, and smaller BMN.

The FROB said the aim of a merger was to improve the recovery of the public funds injected into BFA-Bankia and those of private shareholders. It said it would hire external advisors to carry out the analysis.

"As of today this process is just in discussions and no decision has been taken yet," BFA, the parent company of Bankia said in another filing.

Bankia, whose profits have steadily improved the past three years, is entering a key phase for its return to private hands. Madrid has said it would sell off Bankia by the end of next year. In April, Bankia's Chief Executive Jose Sevilla said the Spanish government was already working with the European Commission on a merger with BMN.

High costs and low returns are expected to spur a new wave of consolidation in Spain's banking industry, where the number of banks has already dropped to 14 from 55 since the 2008 financial crisis.

A new round of mergers could take that total down to just single digits, putting the country on a par with Britain and France. It would also slim down a retail banking network that, according to the Bank of Spain, had the most branches per capita in Europe as recently as 2013.

(Reporting by Jesus Aguado; Editing by Angus Berwick and Jane Merriman)