* "Bad bank" scheme to be presented on Friday
* Tough talks over banks recognising more losses
* Europe demands independent audit of banking system
By Julien Toyer and Jesús Aguado
MADRID, May 11 (Reuters) - Spain is set to intensify the clean-up of its banks on Friday after difficult last-minute talks between the government and lenders on details of planned financial system reforms.
At its weekly cabinet meeting, the government will approve a plan to force banks to park their toxic real estate assets in holding companies that would later sell them off, a move that could deepen losses for the lenders.
The cabinet is also expected to demand banks to set aside a further 35 billion euros ($45 billion) to cover sound loans in their real estate portfolios. The government has already obliged banks to make provisions of 54 billion euros to cover bad assets.
A definitive clean-up of troubled banks, as well as an accelerated 2014 budget, are among a package of reforms that could win centre-right Prime Minister Mariano Rajoy more time from the European Union to hit tough deficit targets, EU sources have told Reuters.
"Spain is walking on the edge of a cliff. If they fail to deliver, what has been so far a national crisis will degenerate into a systemic crisis for the EU," one senior source said.
Hoping to put an end to its four-year banking crisis, Spain effectively took over Bankia SA, one of the country's biggest banks, this week after days of market anxiety over the lender's viability.
Spanish stocks were down 2.1 percent on Friday morning, in line with other European markets, after getting a big boost on Thursday from the banking reform plans.
Spain's banks were hit by billions of euros of losses after the bursting of a decade-long property bubble in 2008 and concerns about them, and the country's overspending regional governments, have fanned fears of a new euro zone debt crisis.
The toxic assets now total 184 billion euros, but many fear the hole is even bigger. Successive waves of bank sector clean-ups have failed to convince investors.
The government asked the banks to set aside 30 percent of their sound loans to housebuilders, up from a current 7 percent, but the banks, including major players Santander and BBVA, had pushed back with a lower number.
The creation of holding companies for each bank's problematic property assets would be voluntary for lenders able to make the provisions with no external help. But those that cannot would be forced to set up liquidation schemes and request public money, the sources said.
A senior euro zone source said an outside audit of the health of Spanish banks was key to reassuring investors that the difficult situation of the banks would not push Spain into seeking an Irish-style bailout.
"What are you going to do to ensure that this transparency, especially of real estate valuation, has consequences for provisioning and recapitalisation measures?" the source said.
"Quite obviously ... it is too early for (Economy Minister Luis De Guindos) to give definitive answers to these questions, but I expect that he will be able to offer a plan ... to increase transparency, possibly via using outside expertise."
Financial sources said the appointment of external auditors could lead the banks to recognise further losses on top of those already reflected in banking reforms presented in February.
This would eventually force a new wave of mergers between the smaller lenders as well as possibly additional takeovers. The government is also likely to inject billions of euros to recapitalise the weakest banks.
But any delay in the new banking reform could have a devastating effect, as yields on benchmark Spanish bonds remain close to 6 percent, inflating the country's borrowing costs.
"The pressure right now is very high and the discredit would be huge if the reform was not to be approved this Friday," a banking source said.