UPDATE 2-Banco do Brasil buys bank, spurs consolidation

(Recasts, adds CEO, Mantega, detail, context, byline)

By Alberto Alerigi and Ana Nicolaci da Costa

SAO PAULO/BRASILIA, Nov 20 (Reuters) - Brazil's state-run Banco do Brasil agreed to buy a large public bank on Thursday, spurring further consolidation in the banking sector of Latin America's largest economy.

Banco do Brasil said it would buy Nossa Caixa, a commercial bank owned by the state of Sao Paulo, for 5.39 billion reais ($2.25 billion).

Banco do Brasil expects year-end approval from the Sao Paulo state assembly for a deal it hopes will generate between 2 billion and 4 billion reais in synergies over 5 years.

It will pay 18 cash installments from March 2009 and make a public offer to buy minority shares in the first half of 2009.

Financial markets were closed for a public holiday, but on Wednesday, Banco do Brasil shares closed down 0.6 at 13.32 reais and Nossa Caixa shed 0.37 percent to 51.30 reais.

Brazilian newspapers said this week Nossa Caixa's market value was around 7 billion reais.

Brazil's second-largest private sector bank, Itau, agreed to buy smaller rival Unibanco earlier this month, creating a Latin American financial giant.

Brazilian state-run banks have played a key role in recent government measures to ease a credit crunch that resulted from the global financial crisis and has begun to diminish domestic consumer demand.

"This acquisition is positive because private banks are growing in Brazil," Finance Minister Guido Mantega told reporters in Brasilia.

"The important thing is that Banco do Brazil be strong," he said.

President Luiz Inacio Lula da Silva said on Tuesday he wanted Banco do Brasil to be Brazil's largest bank. Despite the acquisition it remains No. 2 in terms of assets, based on corporate data filed with authorities.

Some analysts see room for more mergers and acquisitions in Brazil.

"The consolidation doesn't end here," said Joao Augusto Frota Salles, senior analyst at RiskBank consultancy.

The government has authorized Banco do Brasil and Caixa Economica Federal, also a federal bank, to buy into other financial institutions to help keep the crisis from spreading.

Banco do Brasil's Chief Executive Antonio Francisco de Lima Neto said it was interested but had no immediate plans for further acquisitions.

"We don't have other opportunities at the moment," Neto told TV Globo. (Additional reporting by AnaPaula Paiva; Editing by Raymond Colitt and Brian Moss)