UPDATE 1-Banco do Brasil begins talks to buy state bank

(Adds detail on talks, background on Brazil's banks)

BRASILIA, Feb 5 (Reuters) - State-run Banco do Brasil (BBAS3.SA), Latin America's largest bank by assets, said on Thursday it began talks to buy Espirito Santo State Bank.

Relevant details would be announced as talks advance, it said in a statement to the securities and exchange commission.

The potential acquisition bank is owned by Espirito Santo, one of Brazil's smaller states. It agreed to non-binding talks with Banco do Brasil, the statement said.

Banco do Brasil spent 10.1 billion reais ($4.37 billion) in recent weeks to buy into two local banks as part of a broader consolidation in Brazil's banking sector.

In January Banco do Brasil agreed to take a 50 percent stake in Banco Votorantim and in November agreed to buy Nossa Caixa (BNCA3.SA), a commercial bank owned by the state of Sao Paulo.

President Luiz Inacio Lula da Silva said he wants a strong and large public bank to compete with private banks.

Itau (ITAU4.SA), the country's second-largest private-sector bank, agreed to buy smaller rival Unibanco UBBR11.SA last year.

Lula has urged banks to reduce large interest rate spreads and extend more consumer loans as a way to boost flagging demand. (Reporting by Aluisio Alves; Writing Raymond Colitt; editing by Gary Hill)