MADRID (Reuters) -Spain's BBVA said on Monday it would move ahead with its hostile takeover bid for smaller rival Sabadell despite the government effectively blocking it from fully merging with its smaller rival for at least three years.

The government said on June 24 BBVA would not be allowed to integrate its operations with Sabadell for at least three years as one of the conditions imposed on the more than 14 billion-euro ($16 billion) bid. The cabinet could extend this condition for another two years, it said.

"After reviewing (the government) resolution BBVA has decided not to withdraw the offer and, therefore, it remains in effect in accordance with the applicable regulations," it said in a filing with the stock market supervisor.

Proceeding with the offer means BBVA must comply with the requirements set by the government on grounds of common interest such as protecting workers, protecting companies and protecting financial customers.

Following Madrid's decision, BBVA said it was reassessing the impact on the expected 850 million euros in cost savings it had previously announced. On Monday, it did not disclose any details.