* Bankers see at least four or five takeovers in medium term
* Targets: assets of nationalised savings banks
* Santander, BBVA and Caixabank to be main drivers
* Popular will not be on the prowl, could become prey
* No interest seen from foreign banks in Spanish lenders
By Jesús Aguado
MADRID, Oct 26 An emergency cash injection from Europe is set to trigger more takeovers in Spain's shrinking financial sector, leaving around 10 banks compared with more than 40 just three years ago.
Spain's banks have been forced into mergers since a decade-long property boom collapsed, lumbering them with a glut of unsold homes, undeveloped lots and bad loans.
More than 30 small regional savings banks, or cajas, have already been swallowed up by bigger lenders, or have merged together, leaving 14 substantial banks.
Now, bankers say, the strongest four or five of those are likely to buy the weakest lenders - banks that have already been taken over by the state or smaller lenders.
The carrot for buyers is 40 billion euros ($52 billion) of European bailout money that will help clean up the weaker banks and force them to offload soured assets to a bad bank being set up by the government, making them more attractive targets.
Independent stress tests of the country's banks left a very clear map of seven predators and seven prey, said a Spanish banker who did not want to be identified.
"Four or five of the relatively healthy lenders will embark on the hunt for four or five weaker institutions in the short to medium term," the banker said.
Foreign buyers are expected to stay away because of the huge risks in Spain, struggling with a sovereign debt crisis.
House prices are still falling and bad loans will continue to rise for at least another year, as consumers and businesses default in a deep recession.
The likely predators are healthy banks Santander, BBVA, CaixaBank, Sabadell and Kutxa, a Basque lender.
Their targets are likely to include nationalised banks Catalunya Caixa, NovaGalicia Banc and Banco de Valencia , as well as other small banks such as Banco Mare Nostrum or Caja 3.
Mid-sized bank Popular is not seen strong enough to go on the hunt for acquisitions, but could become a target for a buyer if it fails to carry out an ambitious capital hike.
A new law, passed to meet the conditions for European aid, makes it easier for the state to liquidate banks and sell them off in pieces.
"There will be fierce competition among lenders to buy the most valuable assets," said Ángel Berges, chief executive at independent think tank Analistas Financieros (AFI).
Nationalised lenders Bankia, Catalunya Caixa, NovaGalicia and Banco de Valencia will take huge losses on piles of homes and vacant lots they will transfer to the bad bank.
A financial source with knowledge of negotiations said that as a condition of the rescue, the four banks will shrink their balance sheets by up to 40 percent, making them cheaper buyout targets.
Santander, BBVA and Kutxa are among the frontrunners for acquiring Catalunya Caixa, with assets of around 80 billion euros, say banking sources.
NovaGalicia, with assets of around 75 billion euros, could be a welcome target for Caixabank, the sources say.
Popular, which an independent audit showed has a capital gap of 3.2 billion euros, has embarked on 2.5 billion euros shares issue as it tries to avoid being taken over by the state or a competitor.
"If Popular cannot make it on its own Caixabank will be sniffing around," a Spanish banker said.
Feeding into the merger frenzy will be a number of small lenders that were created from tie-ups of weak former savings banks, or banks in mergers that have now fallen apart.
Banco Mare Nostrum, a merger of four savings banks with total assets of around 68 billion euros and which the audit showed needing 2 billion euros in capital, could end up being restructured with public funds, said a banker with knowledge of the process.
A merger that was called off was a three-way tie-up between small banks Liberbank, Ibercaja and Caja 3. The audit revealed the potential group had a combined deficit gap of 2.1 billion euros, leaving Caja 3 as a candidate to be taken over by the state and sold off, since it is the most exposed of the three.
Another merger now in doubt, is Unicaja, Caja Duero and Caja Espana. As a group, they passed the stress test, but Caja Duero and Caja Espana together have a capital shortfall of 2.1 billion euros.
($1 = 0.7711 euros) (Editing by Erica Billingham and David Cowell)