The reform is a cornerstone of government measures to ward off fears the euro zone's fourth largest economy may suffer a debt crisis similar to Greece - though an analyst said raising new funds for the banks in the current climate would be tough.

The new law, which the government said opposition lawmakers would approve, complements an ongoing consolidation of Spain's unlisted regional lenders, known as "cajas".

Economy Minister Elena Salgado said that process is virtually complete and has shrunk the network of 45 savings banks to 19, all of which EU stress tests had shown were solvent.

"This restructuring process has brought strength," she said.

Analysts said access to private capital and the curbing of political influence will help to bring the savings banks, set up hundreds of years ago to protect small farmers during years of poor harvest, into line with listed banks. "In situations of crisis it's difficult to raise capital, but this reform is useful in the medium and long term," said Garcia Pascual at Barclays Capital.

"The general purpose is to try and de-link the cajas from the strong political influence over the sector," added Giada Giani, analyst at Citi. "It's a positive sign for the sector."

Savings banks account for around half of the assets and deposits in Spain's financial system.

Europe-wide stress tests, due to be released on July 23, would show they and all of Spain's other banks are solvent, Salgado said. All the savings banks are taking part in the tests, designed to evaluate banks' resilience in a crisis.

Although the cajas avoided the meltdown stemming from toxic US mortgage-related assets during the first part of the financial crisis, they are heavily exposed to Spain's own property crash.

Analysts estimate the savings banks have on their books two-thirds of the more than 300 billion euros ($380 billion) owed to banks by property developers.

"Cajas were highly exposed to commercial real estate, that is going to need substantial capital to bring them to healthy capital levels. This regulation is going to help them," said Antonio Garcia Pascual, analyst at Barclays Capital.

Barclays Capital projects losses linked to the construction and developer sector net of provisions, profits and recoveries of around 46 billion euros for the Spanish banking sector, with a large chunk of that linked to the savings banks.

Spain's savings banks are mutually owned and controlled by a mix of depositors, employees and local politicians. They specialize in savings accounts and loans and invest part of their profits in social and cultural causes.

Under the new rules, the banks will be able to issue a form of share, including voting rights, representing up to half of their capital.

Last year the government set up a bank fund with access to up to 99 billion euros ($126 billion) to help the lenders merge. Banks have claimed 11.2 billion euros of this fund so far, Salgado said at the government's weekly press conference on Friday.

Nearly 7 billion euros of the fund comes from government funds, while 2.25 billion has come from the banks' own coffers. A further 3 billion euros comes from a bond sold in November. Any further funds, if needed, will be raised from bond issues.

Salgado said in mid-June that Spain's banks would use less than a third of the total before the process was over.

Many of the savings banks are run by local politicians and have been used as pawns in regional power struggles.

Ailing Cajasur, recently taken over by the state, was run by the Catholic church, while one of Spain's biggest savings banks, Caja Madrid, was at the centre of a 18-month battle for control between opposing factions of the Popular Party (PP) government in the Spanish capital.

The new investor law is effective immediately but must be ratified by parliament. The government has not yet given a date as to when lawmakers will vote on the decree, but said the PP - now in opposition - has pledged its support.