By Sarah N. Lynch

WASHINGTON (Reuters) - The U.S. Consumer Financial Protection Bureau said on Thursday that Santander Bank would pay $10 million to settle charges that it engaged in illegal overdraft practices.

The regulator said the bank's telemarketing vendor deceptively marketed its overdraft protection services and then signed customers up for them without their consent.

It said some call representatives also misrepresented the protection as free, and mistakenly told customers they would be charged overdraft fees for one-time debit card purchases and cash machine withdrawals. Recent changes in the law allow customers to cancel those transactions after being notified they have insufficient funds, to avoid overdraft fees.

"Santander Bank is committed to always treating our customers fairly and ensuring our vendors do too. We regret that the vendor we hired to promote this service may not have followed our instructions and we did not supervise them as closely as we should have," said a bank spokesperson, adding the company is terminating its relationship with the vendor and implementing additional oversight of vendors and processes.

The CFPB, created in the 2010 Dodd-Frank Wall Street reform law as a consumer finances watchdog, has been turning its attention to overdrafts of late, encouraging retail banks to help depositors avoid the fees and ongoing negative balances.

Santander, a subsidiary of Spain's Banco Santander SA, failed federal regulators' annual stress test last month.

(Reporting by Sarah N. Lynch; Additional reporting by Lisa Lambert; Editing by Lisa Von Ahn and Andrew Hay)