(Adds confirmation from Madrid, share prices and analysts' comment)
MADRID, Jan 26 (Reuters) - The Spanish government approved a takeover bid by Italian motorway operator Atlantia for Spanish rival Abertis at the weekly cabinet meeting on Friday, the government's spokesman said on Friday.
"This allows Atlantia to enter the competition," Inigo Mendez de Vigo said.
Atlantia is competing against Hochtief, the German arm of Spanish builder ACS, in a takeover battle for Abertis.
Hochtief submitted in October the highest bid, valuing Abertis at around 17.1 billion euros ($21.3 billion), though Atlantia said on Jan. 19 it would call a shareholders meeting to vote on a change to its own offer.
Spain's stock market regulator (CNMV) approved Atlantia's bid in October though is yet to clear the offer made by Hochtief. The government has already given Hochtief's bid the green light.
Through the takeover, Atlantia, controlled by the Benetton family, plans to create the world's biggest toll road operator with a combined market value of more than 40 billion euros, though the offer has met with political hostility from Madrid.
After the CNMV cleared Atlantia's offer, the Spanish government asked the regulator to revoke the approval because the Italian group had not sought government permission to acquire Hispasat, Abertis' satellite business, considered a strategic asset.
Abertis shares were up 0.7 percent after the Spanish government's announcement, while ACS fell 0.5 percent.
On the Milan stock exchange, Atlantia was up 0.6 percent.
"The approval of the transfer of Spanish toll roads by the government is a positive evolution in the process, although does not provide a cross reading to what will be deliberated regarding the Hispasat stake transfer nor how these situations may impact the bid for Abertis," Caixabank/BPI said in a note to clients.
($1 = 0.8022 euros) (Reporting by Robert Hetz; additional reporting by Jesus Aguado; Writing by Paul Day; Editing by Tomas Cobos and Mark Potter)