MADRID (Reuters) - Spain will repay another 1 billion euros ($1.09 billion) of a European banking bailout from 2012, the acting economy ministry said on Monday, as the government makes the most of favorable funding markets to whittle down its borrowing costs.

Spain requested the 41.3 billion-euro rescue at the height of the euro zone crisis, when it posted a gaping public deficit and several banks needed shoring up after a real estate crash.

It started returning some of the funds as early as 2014 and has already paid back 5.3 billion euros. Under the terms of the loans, the principal was not due for repayment until in 2022.

Spanish borrowing costs have fallen sharply since the bailout and as the economy exited recession over the past three years, in part thanks to an overhaul of the banking sector.

The acting economy ministry said in a statement that Spain could now finance itself at a lower cost than that of the European loans.

Spanish bond yields dipped five basis points to just over two-week lows of 1.06 percent <ES10YT=TWEB> earlier on Monday, after it emerged the country was finally set to form a government, following a 10-month delay sparked by two inconclusive elections. That drop was reversed later in the day.

(Reporting by Sarah White and Carlos Ruano; editing by Jesús Aguado and Larry King)