* Santander buys failing Spanish bank for nominal sum
* Santander to raise 7 billion euros in capital increase
* Rescue follows intervention by European authorities (Adds detail on writedowns, background)
MADRID/FRANKFURT, June 7 (Reuters) - Spain's biggest bank Santander is to buy struggling rival Banco Popular for a nominal one euro after European authorities determined the lender was on the verge of insolvency.
Santander will ask investors for around 7 billion euros ($7.9 billion) of fresh capital to cover the cost of bolstering Popular, which has been weighed down by billions of euros of risky property loans.
The rescue, which followed a declaration by the European Central Bank that Banco Popular was set to be wound down, marks the first use of an EU regime to deal with failing banks adopted after the financial crisis.
It breaks the mould of using taxpayers' money, instead imposing steep losses on shareholders and some creditors of the bank, a step two debt investors described as unexpected.
The owners of so-called AT1 and AT2 bonds suffered roughly 2 billion euros of losses, while shareholders lost everything. Senior bondholders were spared.
Popular, Spain's sixth biggest bank, has long struggled and repeatedly asked shareholders for fresh money. But a recent acceleration in the withdrawal of deposits compounded its funding problems, triggering its sale.
The ECB had blamed what it called a "significant deterioration of the liquidity situation of the bank in recent days" in concluding that it "would have, in the near future, been unable to pay its debts or other liabilities."
Elke König, Chair of the Single Resolution Board, an EU agency that winds down stricken banks, said that intervention had been needed overnight.
The Spanish reaction to the problem lender was prompt when compared to Italy, which has been grappling for years with the problems of its lenders.
In contrast to the banking crisis that unfolded in 2008, the move in Spain was also accepted with calm on stock markets and European bank shares moved upwards.
"This shouldn't pose any real problems for other banks," said Aberdeen Asset Management Head of Credit Research Laurent Frings. "But it does show that there is real risk in investing in these second-tier names."
BOTIN SEES BENEFITS
Spanish Economy Minister Luis de Guindos said that Santander's takeover was a good outcome for Popular given its situation in recent weeks and it would have no impact on public resources or on other banks.
Santander Chairwoman Ana Botin presented the business case for the hastily-organised deal, arguing that the combination of the two would strengthen the group's geographic reach as the economy in Spain and Portugal improved.
"We welcome Banco Popular customers," she said.
Santander, which was unaffected by the banking crisis in Spain that forced Madrid to seek international aid, said buying Popular would accelerate growth and profit from 2019.
It said it would set aside 7.9 billion euros to cover the cost of so-called non-performing assets - a reference to loans at risk of non-payment.
Struggling under the weight of 37 billion euros of non-performing property assets left over from Spain's financial crisis, Popular had seen its share price slump by more than a half in recent days.
Popular was among a handful of banks that emerged as vulnerable to stress, such as an economic downturn, in a simulation carried out by the European Banking Authority last summer.
Popular remained vulnerable. Its ratio of risky loans is around three times above the average of its Spanish rivals.
But Popular's small and medium-sized company loan portfolio, the largest among Spanish lenders, presents an opportunity for Santander, which said it would now lead this growing market. ($1 = 0.8876 euros)
(Additional reporting by Andres Gonzalez, Jose Elias Rodriguez and Angus Berwick in Madrid, Francesco Canepa in Frankfurt and Jan Strupczewski, Francesco Guarascio in Brussels and Helene Durand in London; writing by John O'Donnell; Editing by Keith Weir)