MADRID--Spain's Banco Popular Espanol SA (POP.MC) confirmed Monday that its board of directors has approved a capital increase of up to 2.5 billion euros ($3.21 billion) to cover a significant capital shortfall.

Banco Popular said in a filing with the Spanish regulator that it will hold a webcast with analysts to discuss its capital raising efforts.

An independent audit conducted by U.S. consultancy Oliver Wyman found that Banco Popular needed EUR3.2 billion in additional capital to withstand potential losses in an adverse economic scenario.

Banco Popular's board, which includes representatives of German insurer Allianz (ALIZF, ALV.XE) and French lender Credit Mutuel, unanimously backed the decision on Sunday, according to a person familiar with the situation.

Such a large capital hike will be highly dilutive for Popular, which has a market value of EUR3.5 billion. Popular had previously said it plans to raise some of the capital it needs by selling assets and retaining earnings.

The Oliver Wyman audit will form the basis for the calculation of how much Spain will need to draw from a EUR100 billion bailout from the European Union, and aims to provide a definite estimate of Spanish bank capital needs four years after the collapse of the Spanish housing boom.

Write to Santiago Perez at santiago.perez@dowjones.com