The steep discounts reflect the worst-case scenario -- a severe economic downturn and continued falling housing prices -- in an in-depth analysis of Spain's banking sector conducted by consultancy Oliver Wyman.

Spain's government is setting up an asset management company, or bad bank, to take on up to 90 billion euros worth of sour real estate assets sitting on lenders' books after a property bubble crashed in 2008.

The bad bank is a condition for Spain to receive up to 100 billion euros in European aid for crippled lenders. In addition, Spain's government may seek a rescue for its public debt as borrowing costs are punishingly high.

Banks will receive capital or government bonds in exchange for property they put into the vehicle, which could take up to 15 years to sell it all off.

"The lenders will have to take additional haircuts of 7 percent compared with the base scenario used in Oliver Wyman's stress test bringing discounts very close to the assumptions used in the adverse scenario," the source told Reuters.

In its stress tests of Spanish banks Oliver Wyman applied writedowns of 45.2 percent on new housing under a base scenario for the economy, and 52.4 percent in an adverse scenario of a 6.5 percent shrinkage of the economy over the next three years.

For second-hand housing, the consultancy projected losses of 40.5 percent in the base scenario -- an economic downturn of 2 percent over two years, followed by a slight recovery -- and discounts of 50 percent in the worst-case.

Banks have already provisioned for a large portion of these write-downs under laws passed in February and May, but the transfer price to the bad bank goes even further.

The source also said lenders would be obliged to transfer undeveloped lots with average discounts of 85 percent of their original book value, an even harsher write-down than the worst-case envisioned in the Oliver Wyman exercise.

"The agreement on asset discounts has practically been closed," the source added.

The European Central Bank, European Commission, International Monetary Fund and Spain's central bank have all been involved in discussing the design of the asset management company.

The prices at which assets will be transferred must be low enough to attract private investors, but not so low as to precipitate bigger losses for Spain's banks.

The bad bank has been designed to hold up to 90 billion euros of assets, but the government expects the final size to be much smaller.

Antonio Carrascosa, managing director of Spain's bank restructuring fund (FROB), said last week at a conference in Barcelona that the final size of the bad bank would be around 60 billion to 70 billion euros implying average discounts on asset prices of higher than 50 percent.

(Editing by Fiona Ortiz)

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