Portugal's central bank said earlier it plans to hold further talks with Lone Star after selecting it ahead of other prospective purchasers including China's Minsheng Financial Holding and U.S. funds Apollo and Centerbridge.

Portugal had hoped to decide on the sale of Novo Banco by the end of last year, ahead of a final August 2017 deadline for the sale.

"We will continue to work tirelessly with the Bank of Portugal... and the Portuguese Government to confirm a final agreement to support Novo Banco for the long-term benefit of its customers, employees, creditors, and the overall

Portuguese economy," Lone Star Europe president Oliver Brahin said in a statement.

The central bank said that Lone Star's proposal "is the one that goes the furthest," in ensuring stability of the financial system and confidence in Novo Banco.

But the central bank added that Lone Star set conditions in its offer that could have an impact on public accounts, which it will seek to "minimise or remove in the deeper negotiations that start now."

The finance ministry welcomed the next stage of the negotiations aiming to overcome those conditions. "The government always underlined that this sales process to private investors must ensure that there is no impact on public finances or cost to taxpayers," it said in a statement.

Lone Star made no mention of conditions on its offer, but it was "deeply optimistic about Portugal" and its economic future, Brahin said. The firm promised to provide the capital and expertise necessary to maintain Novo Banco as a "pillar of the Portuguese banking system," he said.

The finance ministry welcomed the next stage of the negotiations aiming to overcome those conditions. "The government always underlined that this sales process to private investors must ensure that there is no impact on public finances or cost to taxpayers," it said in a statement.

Finance Minister Mario Centeno said on Wednesday that Portugal was not ready to complete the sale of Novo Banco, adding that the government was not prepared to present a state guarantee for the potential buyer.

Portugal salvaged Novo Banco, or the "good bank" in a 4.9-billion-euro rescue of BES in 2014, which collapsed under the weight of debts of its founding family. An attempt to sell Novo Banco in 2015 failed because the bids were considered too low.

The Portuguese authorities have not said how much they are seeking for Novo Banco. The government itself put up 3.9 billion euros ($4.1 billion) for the rescue of BES but analysts doubt it will recover anything near that figure in the sale.

The rescue has led to a series of court cases by shareholders and other stakeholders hit by the process, prompting bidders to fear future litigation.

The central bank said that the next phase of negotiations with Lone Star does not prevent other bidders from returning with improved offers.

(Reporting By Axel Bugge; Editing by Elaine Hardcastle and Alexandra Hudson)

By Axel Bugge