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* BBVA will not participate in Sareb despite government push
* Santander and Caixabank to invest 600-700 mlns euros each
* Insurers and other to put around 500 mlns euros (Adds detail)
By Jesús Aguado
MADRID, Dec 11 (Reuters) - Spanish bank BBVA will not join domestic peers in investing a total of around 2.5 billion euros ($3.3 billion) in the country's so-called "bad bank", four sources with knowledge of the matter said on Tuesday.
Spain's second-biggest bank's reluctance to invest in the bad bank, set up to siphon off bad property assets from bank balance sheets, will be a blow for the government which had hoped the biggest banks would all invest in the scheme.
It was not immediately clear why BBVA had decided not to participate and the bank, which had been blowing hot and cold on its involvement in the bad bank, called Sareb, since September.
The bank would not comment on the matter.
BBVA's decision will not hamper the bad bank's plans to be up and running by year-end, as contributions from other Spanish banks and insurers will top the 2.5 billion euros of private investments - half the total capital of 5 billion - the government needed to reduce the strain on state coffers.
Of the 2.5 billion euros, around 1.6 billion will be in the form of subordinated debt and the remaining 400 million will be in equity.
The vehicle is being set up to help restore stability in the bank sector after a decade-long property boom ended abruptly five years ago. It was also a condition for receiving around 41 billion euros of European loans.
"Healthy Spanish banks plus Ibercaja, Popular and some other smaller banks will invest around 2 billion euros, which will be split according to their market share," said one of the sources who was directly involved in talks between the banks and the Spanish authorities.
"This will take into account the fact that BBVA is not willing to participate."
Insurance companies and other national and international private investors will deliver the remaining 500 million euros, the source said, adding the latest round of talks was on Monday.
Caixabank and Santander will be the main private contributors with 600-700 million euros each, while Popular and Sabadell will invest 250-300 million apiece, two of the sources involved in the negotiations said.
The sources said the final numbers may need fine-tuning by the end of December.
Caixabank, Popular, Sabadell and Santander all declined to comment, as did the economy ministry and the Bank of Spain.
BBVA chief executive Angel Cano said in October the bank had no interest in investing, a turnaround from earlier comments by chairman Francisco Gonzalez who said he was considering taking a stake in the scheme.
Analysts have said BBVA was right to express doubts about the profitability of the bad bank which aims to have a return on equity of 14-15 percent in a conservative scenario.
"BBVA is right to doubt the profitability plans of the Sareb as it is very difficult to see how to make money by selling loans or real estate assets in a depressed property market," said Angel Berges, chief executive officer at Analistas Financieros Internacionales, a think-tank.
Since peaking in 2007, housing prices have fallen around 30 percent, on average, and analysts consider the bottom of the market may still be two years off with prices potentially falling a further 20-30 percent.
The government is studying the possibility of giving tax breaks as a sweetener for lenders willing to invest in the bad bank's equity, another banking source said.
"If BBVA does not participate in the end, it will be penalised in some way," the source said.
The economy ministry said no decision had been taken yet.
The decision from BBVA not to participate comes as the government struggles to lure international investors.
The bad bank drew a lot of interest among foreign investors but they said they wanted more clarity on the assets to be transferred into SAREB, their value and how sales of the loans will eventually be financed.
Four nationalised lenders - Bankia, Catalunya Banc, NCG Banco and Banco de Valencia - will dump 45 billion euros of assets into Sareb by year-end. Four other lenders with lower capital needs, such as Banco Mare Nostrum (BMN), were then expected to put around 15 billion euros into the bad bank by February. ($1 = 0.7736 euro) (Additional reporting by Carlos Ruano and Andres Gonzalez; Editing by Dan Lalor and David Holmes)