TSB agrees to 1.7 billion pounds takeover by Spain's Sabadell

LONDON/MADRID (Reuters) - British bank TSB has agreed to a 1.7 billion pounds takeover by Spanish lender Banco SABADELL (SAB.MC) in one of the biggest cross-border banking deals since the financial crisis of 2007-9.

Sabadell, Spain's fifth-biggest bank, said it planned to grow TSB, which was spun out of Lloyds Banking Group last year, into a significant challenger to Britain's 'big 4' lenders -- Barclays , HSBA.L Lloyds Banking Group , Royal Bank of Scotland .

Lloyds was ordered to sell TSB by European regulators as a condition of its 20 billion pounds bailout during the crisis. Lloyds said on Friday it had agreed to sell a 9.99 percent stake to Sabadell and entered into an irrevocable undertaking to sell its remaining 40.01 percent stake to the Spanish bank.

Cross-border takeovers have been rare in the banking sector since the financial crisis, with bigger banks focusing on slimming down to bolster capital and meet tougher regulations.

Sabadell said that it would raise 1.6 billion euros (1 billion pounds) of new capital at 1.48 euros per share to help fund the deal.

TSB's Chief Executive Paul Pester and Finance Director Darren Pope will continue in their current roles, the banks said.

(Additional reporting by Liz O'Leary in Madrid, editing by Sinead Cruise)