* Total EU aid for Spanish banks amount to 41.4 bln euros
* Spain will nationalise two new former savings banks
* Lenders will shrink balance sheets, cut jobs
By Jesús Aguado and Foo Yun Chee
MADRID/BRUSSELS, Dec 20 (Reuters) - The European Union has approved a cash injection of 1.87 billion euros ($2.5 billion) into four Spanish savings banks, the second phase of an overhaul of the country's banking sector.
In return for the funds, the four lenders, which ran into trouble when a decade-long property boom burst five years ago, will reduce their balance sheets by up to 40 percent by 2017.
The plans include at least 4,000 job cuts, on top of the around of 8,000 already announced in the first phase of Spain's banking clean-up.
The banks will have to refocus on retail and small business lending in their core regions and two of the banks - BMN and CEISS - will be nationalised. The other two, Caja 3 and Liberbank, will receive temporary aid through contingent convertible bonds, known as Cocos.
Spain has committed to sell CEISS and have BMN and Liberbank listed before 2017. Caja 3 will cease to exist as a standalone entity and will be integrated into bigger lender Ibercaja.
This will leave Spain's banking industry with about 12 entities compared to the more than 50 which existed before the financial crisis began in 2007.
"The restructuring plans of BMN, Caja3, Banco CEISS and Liberbank will make these banks viable again, thereby contributing to restoring a healthy financial sector in Spain, while minimising the burden for the taxpayer," EU Competition Commissioner Joaquin Almunia said at a news conference.
An independent audit showed in September Spain's banking system needed around 60 billion euros to weather a serious downturn of the economy.
Spain has already received 39.5 billion euros of European funds to prop up nationalised lenders Bankia, CatalunyaBanc, Novagalicia Banco and Banco de Valencia and to set up a so called bad bank.
Separately, two banks - Banco Popular and Ibercaja - raised money by themselves to cover their needs, while seven out of the 14 lenders tested were considered by the audit to be well enough capitalised.
Transfers of distressed property assets into the "bad bank" and losses imposed to shareholders and junior bondholders have reduced the final amount of public cash needed by around 20 billion euros.
The Bank of Spain on Thursday said junior bondholders in the four lenders would take haircuts ranging between 10 percent to 75 percent..
The rescued banks have also committed to sell a number of industrial stakes and subsidiaries and to limit the remunerations of the executives.
Liberbank, which has already sold its 5 percent stake in the gas operator Enagas, still has smaller stakes of 5 percent in IT firm Indra or a 6.1 percent of the pulp company Ence.
BMN owns a stake in oil producer Deoleo.