By Jesús Aguado

MADRID (Reuters) - BBVA's long pursuit of Sabadell is becoming even longer, with Spanish regulators launching an in-depth review of its bid, which fell further in value after Donald Trump's U.S. election victory fuelled concerns over its Mexican business.

Spain's CNMC on Tuesday announced a "phase 2" process that gives the competition authority at least three more months to assess the hostile bid by the second-largest Spanish bank.

While expected by many analysts given intense political scrutiny and government opposition to a deal, the CNMC's decision marks a blow for BBVA, which had wanted the regulator to approve its offer with minimum remedies and free the bank to proceed to the next stage of its takeover proposal.

Instead, a longer CNMC examination heightens concerns about the regulator demanding bigger remedies, raising uncertainty for the BBVA at the same time as analysts and economists say potential protectionist measures under Trump could hit the bank given it earns more than half its profit in Mexico.

Sabadell says a merger would negatively impact competition for lending to small and medium-sized Spanish businesses.

One source familiar with the matter said that a phase 2 probe would not necessarily set unachievable remedies for BBVA, although that won't be clear until well into 2025.

BBVA, for which one of the main motivations of the deal is to diversify away from emerging markets, said it would continue to work "constructively" with the Spanish competition authority to finalise as soon as possible agreement on remedies and the approval of the deal.

Meanwhile, Mexican jitters have hit BBVA's stock price, which is a worry for both banks given its offer for Sabadell is entirely in shares.

BBVA's shares have fallen around 7% since Trump's win, bringing the total drop to 18% since the bid was announced in April and valuing the offer for Sabadell at 9.83 billion euros, down from an initial 12.28 billion euros.

"The more time passes, the more uncertainty, the more volatility you are going to have," German Lopez, professor of finance at Spain's IESE business school said before the CNMC's decision was announced.

Concern is focused on its general exposure to the Mexican economy rather than any suggestion of tariffs on BBVA itself.

Lopez said the more protectionist a Trump presidency "the worse it will be for BBVA", adding: "the effect of this uncertainty on BBVA is clear".

Nevertheless, many shareholders will ignore short-term headwinds to focus on BBVA's strong position in Mexico and Turkey, say analysts, who still expect a deal to happen.

Bankinter's Rafael Alonso noted that BBVA and Sabadell shares continue to track each other, signalling that the market gives the deal a "reasonable chance" of success.

'UNACCEPTABLE'

BBVA CEO Onur Genc has said publicly any remedies imposed by the CNMC should be "non-structural", citing past precedents and the fact the combined group would not be Spain's biggest lender.

And BBVA could walk away if conditions were "unacceptable".

Speaking before the CNMC decision, Spanish broker Alantra, however, said it believed that the anti-trust body could impose hard remedies, implying asset disposals and therefore "revenue losses and thus negative synergies".

The CNMC verdict is also crucial for Spain's market supervisor CNMV, which must give its approval before allowing BBVA to take its offer to Sabadell shareholders.

The premium BBVA offered over Sabadell's April 29 closing share price has shrunk from 30% to around 5%, which reduces the bid's appeal, analysts say, especially for retail investors, who make up around half Sabadell's shareholder base.

"What they really have to analyse is what is the premium they are giving me today and the risk I am assuming by taking a stake in another entity exposed to Mexico," said Alonso.

BBVA executives say the bank has no need or intention to improve its bid, despite some analysts predicting it will do so.