* Provisions must be raised to between 35-80 percent
* Banks have until end of yr to raise provisions from 30 pct
* Merged banks will be given two-years
By Sonya Dowsett
MADRID, Feb 2 (Reuters) - Spain's banks must raise 50 billion euros ($65.86 billion) in extra funds to compensate for foreclosed properties and bad loans to housebuilders festering on their balance sheets, under new rules revealed on Thursday.
The centre-right government gave newly-merged banks and banks planning tie-ups extra time, two years to write down deteriorating assets by setting aside provisions. Other banks will get one year.
"The Spanish banking system will emerge from this process stronger, with fewer but more solid banks, meaning that Spanish lenders will be among the healthiest in the European Union," the Economy Ministry said in a statement.
Spain's battered banks have cut back on lending to families and small businesses in a country desperately in need of credit as it continues to battle the euro zone debt crisis and heads into a second recession in four years.
By cleaning the banks' balance sheets of worthless property assets, hammered in a property crash four years ago, the new government hopes to rekindle investors faith in Spanish banks -- allowing them to borrow on the international money markets and start lending at home again.
The banks have been largely shut out of interbank markets ever since the Greek bail-out in early 2010.
Banks must make a specific provision from results totalling about 25 billion euros across the entire sector, Economy Minister Luis de Guindos said in a news conference.
In addition, banks must put aside capital equal to 20 percent of the book value of undeveloped lots and 15 percent of the book value of unfinished developments. That will amount to around 15 billion euros for all the banks and can come from profit, capital hikes or convertible bonds.
For performing real estate loans, banks must make a generic provision of 7 percent, taken against results, to total around 10 billion euros. Previously banks were not required to make any provisions for those loans.
The government will lend to banks that struggle to meet the new requirements through convertible shares. If a bank fails to pay back the loan during this time, the state will take it over.
The reform is very similar to the former Socialist government's 2009 round of mergers and recapitalisation. At that time banks raised provisions against problem loans and property losses to about 30 percent.
Provisions against losses will now rise to between 35 percent and 80 percent, depending on the type of asset or loan.
Banks looking to merge to meet the new requirements must present their plans before May 30 of this year.