Lenders are already writing off 54 billion euros on soured property assets dating from a 2008 real estate crash and the requirement to find more money to cover loans that are currently sound, but could sour as the economy deteriorates, will pile further pressure on banks as they battle to find extra capital.

The move is set to be announced after Friday's weekly cabinet meeting and will form part of a wider banking reform which will include an injection of public cash into troubled lender Bankia.

The government will demand banks raise provisions to a level equivalent to 30 percent of loans to housebuilders, one of the sources told Reuters late on Tuesday, up from a current 7 percent.

The Economy Ministry declined to comment.

Spain's banks have 298 billion euros in loans to building developers on their books, equivalent to around 30 percent of the country's gross domestic product.

Around half of them are already in arrears and as the economy deteriorates more will fall into default. Analyst estimates as to how much more banks need to set aside against loan defaults rise to as much as 100 billion euros.

Banks, even strong international lenders like Santander and BBVA, are already posting big falls in profit as they write off losses on bad property investments and increase capital to protect against sovereign default under European guidelines.

Banks are eating into profits, selling assets and buying back debt in order to find the capital without an injection of state funds.

Extra provisions could weigh still more on profits in the sector, analysts said on Wednesday.

The conservative government had said for months it would not put more public money into rescuing the banks, but is expected to pump up to 10 billion euros into the country's fourth largest lender Bankia on Friday.

The government is also expected to announce on Friday plans for banks to siphon real estate assets into separate holding companies.

(Writing by Sonya Dowsett and Nigel Davies; Editing by Michael Roddy and Mark Potter)

• A Permanent Economic Emergency