By Jesús Aguado

MADRID (Reuters) - Spanish bank BBVA's hostile takeover bid for smaller rival Sabadell, announced 10 months ago, faces its latest test as soon as March when the competition regulator may announce the results of its review.

BBVA's surprise move on Sabadell last year was hailed by some industry executives as the beginning of a wave of dealmaking among European lenders. The takeover attempt has highlighted the complexity and political complications of banking M&A transactions.

Below are some of the likely next steps in what would be Spain's second-biggest banking deal by assets.

WHAT HAPPENS NEXT?

BBVA's 12.28 billion euro offer for Sabadell turned hostile in May after it was rejected by Sabadell's board.

The competition regulator began a review and said in November it wanted more time before either authorising the deal, or requiring BBVA to present so-called remedies.

If BBVA's commitments are insufficient, it can impose other conditions and, failing a resolution, it can block the deal.

Analysts think BBVA is likely to stomach the remedies and proceed with the takeover offer, but the longer the deal rolls on the greater the doubts.

Last month, BBVA Chairman Carlos Torres, the architect of the offer, said he expected the regulator to approve it in the coming weeks with "acceptable remedies", such as not closing branches if there is no alternative nearby.

Walking away, which BBVA has said is an option, would be a blow to Torres, although he has said he would not resign.

Sabadell calls BBVA's proposed remedies insufficient and believes structural changes, such as asset disposals, are necessary rather than temporary measures, like preserving working capital lines for small businesses.

WHAT ARE THE NEXT HURDLES?

The deal will need sign off from two more institutions - the markets supervisor and the government - before a formal bid, in which Sabadell shareholders will have 30 to 70 days to vote.

The markets supervisor has said it will wait for the government and the antitrust body before deciding.

Prime Minister Pedro Sanchez's government opposes the deal, warning about the impact on jobs and customers.

Sabadell last month decided to move its legal headquarters back to Spain's eastern region of Catalonia, its heartland, in what analysts said was an attempt to shore up political support against a tie-up.

Competition legislation limits the government's scope for intervention, but if the antitrust regulator sets conditions in its review, Spain's economy ministry has 15 business days to take the deal to a cabinet meeting.

The government then has a month to oppose it, known unofficially as a 'phase 3 review'.

How much leeway it has to act is hotly contested. Sabadell's CEO Cesar Gonzalez-Bueno believes the government can impose harsher conditions for public interest reasons; BBVA thinks it can only modify, not add, conditions.

IS A MERGER GUARANTEED?

No. If BBVA is right and the deal proceeds, the government can block a full merger between the banks even if it cannot stop a bid.

In that instance, BBVA might be able to integrate Sabadell at a later stage, banking and supervisory sources said, and in the meantime keep Sabadell as a separate unit.

That is not BBVA's favoured outcome, even if it says it would still be able to achieve most of the same cost savings.

Sabadell rejects that idea.

DO MARKETS EXPECT A TAKEOVER?

In short, yes. They think a deal will happen but that BBVA will need to sweeten the offer.

Any sweetener, which BBVA has ruled out, is unlikely until BBVA reaches the bid acceptance period. Technically, BBVA can sweeten its offer five days before the end of that period.

The main gauge of investor's views of the deal's chances is the correlation of the two banks' share prices, given the deal was largely in shares.

Applying the exchange ratio, Sabadell's share price still reflects the original 30% premium BBVA offered over its April 29 closing price.

"Things change by the day and there are many important stakeholders that still need to have a say here, but the market seems to be pricing a probability that this deal can go through," said Antonio Reale, an analyst at Bank of America.

BBVA could introduce a 1 to 2 billion euro cash component and still generate a return on investment of 18%-19%, he said, adding that the market is expecting a small improvement in the offer.

($1 = 0.9333 euros)

(Reporting by Jesús Aguado; Editing by Tommy Reggiori Wilkes and Philippa Fletcher)