Chavez says he's reviewing Venezuelan-Spanish ties

CARACAS (Reuters) - Venezuelan President Hugo Chavez warned Spain on Wednesday he will review diplomatic and business ties with the former colonial power, escalating a dispute that erupted when Spain's king told him in public to "shut up."

Chavez, who nationalized swathes of the economy this year on a drive to turn the major oil exporter into a socialist state, has demanded King Juan Carlos apologize for reprimanding him and threatened to take action against Spanish investments, especially in banking.

"We do not want to hurt ties, but right now I am conducting a detailed review of the political, diplomatic and economic ties with Spain," the Cuban ally told local television.

"This means Spanish companies are going to have to show what their businesses are doing. I am going to take a look and see what's happening in those companies," he added.

Chavez, who rails at capitalist "imperialism," has named Grupo Santander and Banco Bilbao Vizcaya Argentaria SA , owners of top Venezuelan banks, as possible targets, saying the OPEC nation does not need their business.

As well as straining relations with Spain, the controversy has sparked headlines around the world and eclipsed debate in Venezuela over Chavez's effort to win approval in a December 2 referendum to expand his powers, including ending term limits.

Spain, a top investor in the region, demanded respect from the former paratrooper and complained his rhetoric was counterproductive to easing tensions after the flap at a weekend summit of leaders from Latin America and Iberia.

"(The comments) of the Venezuelan president, especially referring to Spanish companies, do not help us find a way out of the disagreement," Foreign Minister Miguel Angel Moratinos said. "The Spanish government keeps stressing respect, respect. Respect for Spanish institutions, respect for Spanish firms."

Spanish telecommunications giant Telefonica is the biggest mobile phone operator in Venezuela and oil company Repsol also works in a country with some of the largest reserves outside the Middle East.

Spanish companies have invested $2.4 billion in Venezuela since Chavez took office in 1999.

Earlier this year, Chavez took over the biggest phone company in Venezuela, seized oil majors' assets and threatened to nationalize the whole banking sector.

TEMPEST IN A TEAPOT?

At the summit, the Spanish monarch said "Why don't you shut up?" when Chavez interrupted a speech by Spain's leftist Prime Minister Jose Luis Rodriguez Zapatero.

Chavez said the king "blew a fuse" and displayed 500 years of Spanish arrogance.

Chavez's hero is Simon Bolivar, who ejected Spain from South America in the 19th century.

Chavez, who called former conservative Spanish Prime Minister Jose Maria Aznar a fascist at the meeting, has courted controversy at summits before, notably last year by calling U.S. President George W. Bush the devil at the United Nations.

Chavez usually saves his most vitriolic diatribes for the United States but disputes have frayed diplomatic ties with other countries, including Britain and Mexico. He has sometimes withdrawn ambassadors in protest.

But spats have rarely directly affected commercial ties.

Political analysts say Chavez relishes such fights because he uses them to fire up his support base among the majority poor at home with blunt rhetoric that plays on their misgivings of rich countries' investments in Latin America.

He needs to energize his supporters this month because he acknowledges there could be low turnout for the plebiscite.

For David Scott Palmer, a foreign relations professor at Boston University, the dispute was a "tempest in a teapot."

"This is very possibly a nice distraction for him. Chavez ... is going to have to make some noises and rattle some sabers, but I don't think anything will come of it," he said.

(Additional reporting by Brian Ellsworth in Caracas and by Madrid newsroom); Editing by Stuart Grudgings)