Spain's Santander sharply increased provisions against bad loans after defaults rose in its home patch and its biggest market Brazil last year.

Added to writedowns on rotten Spanish real estate, that cut profit by more than half.

Santander, the largest lender in the euro zone, on Thursday said it had now taken the worst pain from Spain's real estate crash five years ago, as it finished booking all of its government-enforced provisions, which totalled 6.1 billion euros (5.24 billion pounds) last year.

The bank added that it had halved its net Spanish real estate exposure to 12.5 billion euros, after a push to sell a record 33,500 properties in the country which is in its second recession in five years.

"In 2013, once we have finished special provisioning, we will see strong growth in results, supported by recurring income and cost control," Santander Chairman Emilio Botin said in a statement.

But its Spanish bad loan ratio rose to 6.74 percent from 6.38 percent at the end of September, pointing to more pain ahead in its home market which accounts for 15 percent of profits and where one in four workers are unemployed.

Bad loans also rose in Brazil, where the economy is slowing, and across the other Latin American countries Santander relies on for the bulk of its profits.

Although that deterioration in credit quality slowed at the end of the year, revenue from the region also disappointed some analysts. Net income interest - the amount made on interest-earnings assets - across the group was lower than many analysts had expected for the fourth quarter.

"Negative revenue trends in Santander's key markets could be an area of concern for investors," Daragh Quinn, an analyst at Nomura said a note. "Although asset quality in Brazil is improving, the gross domestic product expectations for 2013 continue to deteriorate."

Santander shares were down 3.1 percent at 6.2 euros at 1217 GMT.

Brazil generates 26 percent of the bank's profits, which has pushed some analysts to prefer the stock of rival BBVA , a bank more exposed to Mexico. BBVA reports 2012 earnings on Friday.

Santander's group net profit dropped 59 percent to 2.21 billion euros in 2012, missing forecasts by analysts in a Reuters poll.

Total provisions, which include the writedowns on real-estate, rose to 18.8 billion, with a 28 percent increase in money set aside for loans in arrears across the group.

Profit from Latin America dropped 8 percent, which Santander attributed to the sale of its Colombian operation - one of several steps it took last year to bulk up its capital.

Santander said its core capital ratio stood at 10.33 percent at the end of 2012 compared with 9 percent required by Spanish banking authorities.

It added on Thursday that it could list its U.S. consumer finance business on a stock market in the second or third quarter of this year.

The bank also said it had repaid more than two-thirds of the 35 billion euros in three-year emergency loans it took from the European Central Bank, adding that liquidity conditions had eased. The 24 billion euros it paid back corresponded to everything it took from a first ECB auction in December 2011.

(Additional reporting by Jesus Aguado and Tracy Rucinski; Editing by Erica Billingham)