Some 25 European banks failed a "stress test" of their capital strength conducted by European authorities and intended to assess their ability to withstand three more years of crisis.

They included three Cypriot lenders who ranked in the bottom 10 of 130 euro zone banks whose finances at the end of last year were reviewed by the European Central Bank. Of them, however, only Hellenic Bank still has a shortfall to cover, and that of just 105 million euros (82.77 million pounds).

Bank of Cyprus, the island's biggest bank, and state-controlled Co-Op Bank each issued new equity earlier this year and now have enough capital.

A fourth lender based in Cyprus, Russian-owned Russian Commercial Bank (RCB), was not found to have any problems.

"This is the biggest achievement for the Cypriot economy since the devastation of 2013," Central Bank Governor Chrystalla Georghadji told reporters.

Cyprus's outsized banking sector collapsed last year under the weight of bad loans to Greece, leading the island to seek a 10 billion euro bailout form the European Union and International Monetary Fund.

The terms of rescue included the closure of one major bank and the conversion into equity of deposits over 100,000 euros held at Bank of Cyprus to help recapitalise the lender.

Earlier on Sunday, Finance Minister Harris Georgiades said the results of the stress tests could lead to a more rapid easing of capital controls imposed alongside the March 2013 rescue programme to stem a flight of deposits.

"It won't be tomorrow but we shall commence the process of lifting the very last restrictions soon, in a gradual and staged manner," Georgiades told Reuters.

Cyprus still has restrictions on capital transfers abroad, requiring approval of large transactions, although curbs on domestic transfers have been lifted.

Bank of Cyprus successfully raised an additional 1 billion euros from investors this year. Hellenic Bank, which raised capital from U.S. and Russian investors late last year but fell short in the adverse scenario of the stress test, said it was on track to raise more than 200 million euros in additional capital by December.

The tests also showed that 1 billion euros earmarked as a capital buffer for the Co-Op Bank would not be needed. That would have a substantial impact on reducing the island's projected debt, Georgiades said.

Some 1.5 billion euros of the 10 billion euros of bailout money has already been allocated to the Co-Op.

"It (public debt) will now be below 105 percent (of gross domestic product), much closer to 103 percent," Georgiades said, referring to projected figures for 2015.

"This represents a major change of circumstances ... And obviously one which makes the target of going below the symbolic threshold of 100 percent perfectly feasible before 2017."

The exercise provides the clearest picture yet of the health of the euro zone's banks more than seven years after the eruption of a financial crisis that almost bankrupted a handful of countries and threatened to fracture the currency bloc.

While 25 of the euro zone's 130 biggest banks failed the health check at the end of last year with a total capital shortfall of 25 billion euros, a dozen have already raised 15 billion euros this year to repair their balance sheets.

(Reporting By Michele Kambas; Editing by Laura Noonan and Catherine Evans)

By Michele Kambas