LISBON - Portugal will launch a 1.3 billion-euro ($1.5 billion) fund by October to strengthen the capital of small and medium-sized companies hard hit by the pandemic, mainly in the tourism and retail sectors, Economy Minister Pedro Siza Vieira told Reuters.

Depending on demand, up to 2.3 billion euros more could be added to the fund, which will make use of European Union pandemic recovery money, he said on Wednesday.

The initial size of the fund covers most of the government estimate of Portuguese SMEs' immediate capitalisation needs, of between 545 million euros and 1.5 billion euros, he said.

In addition to supporting the solvency of companies in sectors severely hit by the pandemic, such as tourism, retail and parts of manufacturing industry, the fund will "also correct market failures in their access to financing", Siza Vieira said.

He said the goal was to launch the fund by Oct. 1, so that it could quickly start directly financing "economically viable and strategic companies", using equity and hybrid instruments.

"So far, we are on time and taking all steps to implement it. Essentially, we want ... to strengthen the capital structure of companies, as well as encourage growing companies and sector consolidation," he said.

The fund will be managed by the state-run Banco Portugues de Fomento (Portuguese Development Bank), which was set up last year, and will be able to support companies via co-investment programmes with private equity.

Portugal is due to receive nearly 14 billion euros in EU grants, as well as some 2.7 billion euros in loans, by 2026 from the bloc's 750 billion-euro pandemic recovery package.

In total, including the scheme starting in October, it has plans to give 4.9 billion euros to companies over that period to reinforce their equity and support investments in innovation, greener production processes and digital tools and skills.

(Reporting by Sergio Goncalves; editing by Andrei Khalip and Kevin Liffey) ((sergio.goncalves@thomsonreuters.com; +351213509204; Reuters Messaging: sergio.goncalves.reuters.com@reuters.net))