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UPDATE 1-Russia sees strong demand for 10yr OFZ bonds

* Finmin sells nearly all $1.1 billion treasury bond issue

* Moves to settle bonds internationally attracts foreigners

(Adds analyst comments, context)

MOSCOW, Oct 10 (Reuters) - Russia placed almost all the offer of treasury bonds at auction on Wednesday, with strong foreign interest and one bid coming from a large state bank covering nearly 50 percent of demand, three market sources said.

The Russian Finance Ministry sold 34.2 billion roubles ($1.1 billion) of 10-year OFZ treasury bonds

at an average yield of 7.79 percent.

The prospect of Russia adopting a new system to clear transactions warmed up demand at the auction.

Russian bond trading is set to become easier for the world's top investment banks with the creation of a new central securities depository and admittance of international settlement bank Euroclear to the Russian market within the next few months.

The average yield at the auction was at the lower end of initial guidance of 7.78-7.83 percent. Bids up to the cut-off yield totalled 47.6 billion roubles.

"22 bids for 1 billion roubles each were completed. Sources say that it was a large state bank. Whether it represented its own interests or its clients remains to be seen," said Egor Fyodorov, an analyst at ING bank.

Euroclear, a Brussels-based settlement firm owned by the world's top trading banks, has recently reached a deal with the Moscow Exchange to start handling Russian government bonds.

Investors are entering the market in advance, expecting a rise in valuations after the settlement system starts working.

"Foreign investors showed high interest in the long-term issue, because they expect that soon Euroclear and Clearstream will be granted the right to carry out transactions," analysts at Aton wrote in a note after the auction.

Analysts said some investors were selling Russia's Eurobonds to enter the rouble debt market, pointing at narrowing spreads between some papers.

"The spread between Russia's Eurobond maturing in 2018

and OFZ 26204 has narrowed from 120 to 78 basis points lately," Egorov said.

Russia's Finance Ministry plans to auction 335 billion roubles ($10.7 billion) in OFZ treasury bonds during the fourth quarter of 2012.

Following are details of the auction, taken from Reuters Xtra and provided by the Finance Ministry on its Web site ( ): Maturity date 22 Jul 2012 Issue volume 35.0 bln rbls Bids (to cut-off yld) 47.6 bln rbls Issue (alloted) 34.2 bln rbls Issue (funds raised) 34.6 bln rbls Cut-off price 99.4500 Average price 99.6940 Cut-off yield 7.83 Average yield 7.79

(Reporting by Maya Dyakina and Yelena Orekhova, editing by Jason Bush and Elaine Hardcastle)

((maya.dyakina@thomsonreuters.com)(+7-495-775-12-42))

Keywords: RUSSIA OFZ