LONDON (Reuters) - Spain's Banco Sabadell (>> Banco de Sabadell SA) has received approval from Britain's financial regulators for its 1.7 billion pound ($2.7 billion) takeover of Britain's TSB (>> TSB Banking Group PLC), increasing competition for the UK's biggest banks.

Sabadell, Spain's fifth-biggest bank, agreed to buy TSB earlier this year, saying it planned to grow it into a significant challenger to Britain's "Big 5" lenders.

British lawmakers and regulators want to break the dominance of Lloyds Banking Group (>> Lloyds Banking Group PLC), Royal Bank of Scotland (>> Royal Bank of Scotland Group plc), Barclays (>> Barclays PLC), HSBC (>> HSBC Holdings plc) and the UK arm of Spain's Santander (>> Banco Santander, S.A.), which together control more than four out of five personal current accounts in Britain.

Sabadell said on Tuesday the Prudential Regulation Authority and Financial Conduct Authority had approved the deal.

"This is a milestone that enables us to enter a market with vast opportunities," said Sabadell Chairman Josep Oliu.

Sabadell has said it may consider more acquisitions in Britain following the purchase of TSB, which is Britain's seventh-biggest bank.

"With the extra firepower and fresh perspective of Sabadell, TSB will be stronger and even better placed to build on its position as Britain's challenger bank," TSB Chief Executive Paul Pester said on Tuesday.

TSB, which already has 4.7 million customers, was spun out of Lloyds last year after Lloyds was ordered to sell the business by European regulators as a condition of its 20.5 billion pound bailout during the 2007-9 financial crisis.

(Reporting by Matt Scuffham; Editing by Mark Potter)