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LISBON, Aug 6 (Reuters) - The collapse of one of Portugal's largest banks has hurt the country's reputation and punished its assets, but the strengthening economy should help the country recover lost investment, the economy minister said on Wednesday.
The case of Banco Espirito Santo (BES), which was rescued by the state on Sunday after posting huge losses from exposure to the crumbling business empire of its founding family, was "atypical", Antonio Pires de Lima was cited by the official news agency Lusa as saying.
Investors "need to digest what has happened ... But then, I believe the investors will know to make the distinction between that theme and what is essential, that is the positive evolution of the economy," he said.
"I expect that the positive sentiment about the Portuguese economy will prevail."
Portugal's bluechip PSI20 stock index has lost 25 percent of its value since early June when problems associated with the Espirito Santo family and BES hit investor sentiment.
The market slumped 4 percent on Wednesday, led by banks on concerns they will have to foot the 4.9-billion-euro ($6.58-billion) rescue bill announced at the weekend. Portugal's bond yields also rose to close at three-week highs.
"The investor concerns are there, that's why the markets fell," Pires de Lima said, citing the involvement of Portugal Telecom as a factor.
Portugal Telecom failed to inform its Brazilian merger partner Oi that it held 900 million euros in risky debt issued by an Espirito Santo family holding, and when the holding defaulted on the debt, Portugal Telecom was forced to accept a lower stake in the new merged company.
"There have been situations around BES and the behaviour of Portugal Telecom board that are impossible to explain to investors who put their money in Portugal convinced that such things do not happen here."
Portugal's economy started to recover last year and is expected to post its first full year of growth in 2014 after a three-year recession following a debt crisis and an international bailout that it exited in May.
Pires de Lima said Tuesday's unemployment data, which showed the jobless rate in April-June falling for the fifth straight quarter to below 14 percent, was a very encouraging sign and that the government expected positive economic growth for the quarter to be reported next week.
"The economic fundamentals in Portugal have been positive for many months and should continue that way. The capital market offers a discount on Portuguese assets ... and there are significant valuation opportunities after this more complex phase is behind us," he said. (Reporting by Andrei Khalip; Editing by Sonya Hepinstall)