LBG said in a statement that it would receive a 1.8-percent stake in Sabadell, worth about €84 million, plus an additional sum of up to €20 million over the next five years.
"Lloyds Banking Group plc is today announcing that it has agreed to sell its Spanish retail banking operations, including Lloyds Bank International S.A.U and Lloyds Investment España SGIIC S.A.U, to Banco Sabadell," the statement read.
"The sale comprises the group's retail and private banking business and the local investment management business in Spain."
Lloyds added that the sale of the business was expected to lead to a loss of approximately £250 million.
The business consists mostly of retail mortgages and deposits, with a large portion of non-resident clients.
However, LBG's Spanish corporate banking operations, which serve business clients, are not included in this transaction. They will carry on operating as normal.
Lloyds is 39-percent owned by the British government after a state bailout after the 2008 global financial crisis.
"The sale is in line with the group's strategy of rationalising its international presence and ensuring best value for shareholders," it added on Monday.
The deal remains subject to regulatory approval and is expected to complete this year.