Spanish lenders to use bank fund to merge-source

* Two banks would borrow from private, not public fund

* Say 990 million euros required to complete merger

By Jesus Aguado

MADRID, July 29 (Reuters) - Spanish banks Unicaja and Cajasur have told the Bank of Spain they need 990 million euros ($1.4 billion) of liquidity from a private-bank fund to successfully complete their merger plan, a source involved in the process said on Wednesday.

The money would come from the privately run Deposit Guarantee Fund (FGD), a reserve of around 7 billion euros that is funded by the banks themselves.

In June the government created a larger public version -- the Fund for Ordered Bank Restructuring (FROB) -- which has 9 billion euros, some of it from the FGD, and which can borrow up to 10 times that amount to prevent solvency problems at smaller banks damaging confidence in the system.

After heavy lending to Spain's now-defunct property sector, Cajasur's non-performing loans ratio jumped to 7.9 percent at the end of March compared to a 4.8 percent average across Spain's 46 unlisted savings banks. Unicaja's bad loan rate stood at 2.8 percent.

"What has been done is to inform the Bank of Spain of the nature of the merger project and that the plan ... would require private support -- through the FGD -- of 990 million euros," the source said. He added that of that, 440 million euros would go on preference shares to which the FGD would subscribe and the remaining 550 million corresponded to Treasury guarantees. Neither bank, which are controlled by the regional government of Andalusia, commented on the news.

Merger talks between Spain's regionally based savings banks have mushroomed as the country's bad loan rate has quadrupled over the past year, heightening solvency risks.

Official figures show Cajasur had 18.7 billion euros of assets while Unicaja had 32.4 billion as of May this year, making them mid-sized players in the sector. (Reporting by Jesus Aguado; Writing by Ben Harding; Editing by Phil Berlowitz)