By Jesús Aguado

MADRID (Reuters) -Spain's CNMC competition watchdog on Wednesday approved the proposed acquisition of Banco de Sabadell by its larger rival BBVA, though the combined lender will have to accept several remedies in its retail-banking arm if the long-running hostile takeover bid clears the remaining hurdles.

The acquisition, which is opposed by the Spanish government, still has to be authorised by the stock market supervisor CNMV. An economy ministry spokesperson said it would pore over the CNMC report once it has received it.

The CNMC said the commitments presented by BBVA during the approval process to solve the problems that the deal poses for competition in the affected markets were "adequate, sufficient and proportionate".

The so-called remedies, or commitments, are the measures a company acquiring another agrees to take to ease the impact of a takeover deal on the competitors, customers and suppliers.

BBVA wants to create a bank with over 1 trillion euros ($1.13 trillion) in total assets to help it gain scale and better cope with a lower interest rate environment.

BBVA, which shocked Spain in May when it turned hostile in its pursuit of Sabadell with a more than 12-billion-euro bid at the time, relies on Mexico for around half of its profit and combining with Sabadell would allow it to increase lending to small and medium-sized companies in Spain.

($1 = 0.8835 euros)