Two of the banks, Canarias and ProVivienda (BanPro), will be permanently closed and their assets will be auctioned off, Finance Minister Ali Rodriguez said.

Most deposits in those banks will be covered by the state deposit insurance fund, while the banks are liquidated, he said.

The government will try to rehabilitate the other two banks, Confederado and Bolivar, because their financial problems seem surmountable, Rodriguez said.

The government had taken over management of the banks - which account for 5.7 per cent of Venezuela's banking sector - on November 20, citing various violations.

Officials had initially decided the banks would remain open while authorities investigated.

"The damage caused has been of such severity that it has severely compromised the solvency of those institutions," Rodriguez told state television.

Two have been arrested in the scandal: key investor Ricardo Fernandez and his lawyer, Jose Camacho, are charged with misappropriating deposits and providing loans to other businesses in which they were investors.

The four banks were purchased in September and October by a group of investors headed by Fernandez, who is involved in the food industry and sold products to a network of state-run subsidised markets known as Mercal.

Origins of the funds

Authorities have said investors had been unable to show the origins of the funds used to buy the banks, in spite of requests by regulators.

The announcement of the banks' closure came a day after President Hugo Chavez threatened to nationalise any banks that violate regulations, saying he will do whatever is needed to prevent irregularities.

"I warn the country's private bankers: I'll take away any bank from anyone who slips up," Chavez said during his Sunday television and radio programme. "Do you want me to nationalise the banks?" he said, adding that he would have "no problem" ordering state takeovers.

Chavez's government has sought a bigger state role in the banking sector, and in May agreed to buy the formerly private-run Banco de Venezuela from Spain's Grupo Santander for about US$1 billion.

With that acquisition, the government now has five com-mercial banks, which together account for about 21 per cent of deposits and 16 per cent of loans. Other banks remain in private hands.

The finance minister said the state deposit insurance fund will handle the liquidation of Canarias and BanPro, and payments to depositors and employees. He said state deposit insurance will immediately cover 97 per cent of BanPro depositors, and 92 per cent of Canarias depositors - whose deposits are less than the coverage limit of 10,000 bolivars, or US$4,651, each.

Others holding higher amounts in deposits would be owed reimbursement once the banks' assets are sold off.

- AP