By Jesús Aguado

MADRID (Reuters) -The Spanish government will examine BBVA's hostile takeover offer for Sabadell, the economy minister said on Tuesday, a rare step that could mean the bank must agree to more conditions before its bid is approved.

Madrid has so far opposed the transaction, valued at over 14 billion euros, because of the risk it could lead to job losses.

After Economy Minister Carlos Cuerpo's decision to put the deal to the cabinet, the government now has until the end of June to decide on whether to approve it with or without conditions on grounds of common interest, extending a process that began more than a year ago with BBVA's hostile offer.

BBVA has cleared most of the hurdles needed before taking its offer to Sabadell shareholders, including securing the European Central Bank's approval.

"Our internal analysis indicates that we need to further monitor the potential impact of this operation on elements that are as important and vital to our economy as job protection, financial inclusion and territorial cohesion," Cuerpo told reporters.

These conditions are different from the competition criteria used by Spain's antitrust watchdog when it cleared the deal subject to several remedies.

BBVA, which aims to create the second-biggest bank in Spain by credit volume after Caixabank, reaffirmed after the decision that the deal "serves the general interest of Catalonia, Spain and Europe".

A Sabadell spokesperson said that the bank was "fully convinced" of its stand-alone strategy.

Euro zone banking supervisors have long wanted to see more banking consolidation to strengthen lenders, but the prospect of deals has been hampered by various factors, including politicians' preference to protect jobs, and in the case of cross-border deals, for home-grown champions.

PUBLIC CONSULTATION

The Spanish government also recently started a non-binding public consultation to gather the views of citizens and businesses, an unprecedented move for such transactions.

"The public consultation (...) points to the existence of reasons of general interest that may be affected by the deal," Cuerpo said, adding that five ministries requested that the transaction be referred to the cabinet.

Some observers said the government's consultation was a further sign of political opposition to the deal.

Spain's stock market supervisor has said it would wait for the government's decision before potentially authorising BBVA's takeover prospectus, which would allow BBVA to formally take the bid to Sabadell shareholders and kick off an acceptance period.

Under Spanish law, the government cannot stop a bid from being made, but it will have the final word at a later stage on whether to authorise a full merger.

In case Madrid blocks the full merger, BBVA could still aim to secure the majority of voting rights or 49.3% of Sabadell's capital, and then try to integrate Sabadell at a later stage.

($1 = 0.8828 euros)

(Reporting by Jesús Aguado; additional reporting by Emma Pinedo; Editing by Tommy Wilkes, David Latona and Emelia Sithole-Matarise)