UPDATE 1-Croatia approves plans for sale of last state bank, insurer
* Poland's PZU, Croatia's Adris group eye stake in CO
* HPB to be sold in its entirety
(Adds revenue target from stake sales in para 5)
ZAGREB, July 18 (Reuters) - New EU member Croatia, under pressure to cut its debt, approved long-awaited plans on Thursday to sell stakes in HPB, its last state-run bank, and in leading local insurer Croatia Osiguranje.
The former Yugoslav republic, which joined the European Union this month, is in its fifth year of recession and has been warned by the European Commission about its rising debt and deficit levels.
The government plans to sell a majority stake in Hrvatska Postanska Banka (HPB) and a minority stake in Croatia Osiguranje (CO) but said both companies would require capital injections by whoever buys the assets.
Poland's state insurer PZU and Croatian tobacco and tourism group Adris are seen as the frontrunners to buy the stake in CO.
State radio said the government aimed to raise around 2 billion kuna ($348.49 million) altogether from the two sales.
Finance Minister Slavko Linic told a cabinet session that the government would hold a public tender for CO before the end of this month and would short-list potential investors in late September. He has previously said it aims to complete the sale of HPB by the end of this year.
The state holds 80 percent of insurer CO, which has a market capitalisation of around 2.2 billion kuna ($383.34 million), and plans to sell a 42 percent stake. But Linic said investors would eventually gain a majority stake after they inject capital.
"We're talking about a capital injection of several hundred million kuna, and the government would end up with a stake of 28-29 percent," Linic said.
"This company could increase its market share and expand in the region, but it is evident that it does not have enough capital to finance that," he said.
Croatia has been privatising state assets since the 1990s but these will be the first under the current centre-left government, which came to power at the end of 2011. It has not estimated how much the stake sales will raise.
The government is struggling to keep spending under control and reduce public debt, which is close to 60 percent of gross domestic product, the ceiling tolerated by the EU. The government forecasts a general budget shortfall of 3.5 percent of GDP this year, down slightly from a deficit of 3.8 percent last year, which amounted to 10 billion kuna.
It will sell a 99 percent of Hrvatska Postanska Banka (HPB), a stake currently jointly held by the state postal service HP and the state pension fund.
The bank, the only reasonably sized Croatian bank still owned by the state and not by a foreign bank, has an 8 percent share of the local banking market, which is dominated by Italian and Austrian banks.
HPB was hit by an indictment last year of its former chief executive and two other top managers for corruption because of politically linked loan mismanagement.
"We want to ensure the bank's survival and further growth but the state budget cannot do that. Therefore, we see no need for the state to remain in the bank, which also needs a capital boost, and we plan to sell the entire 99 percent," Linic said.
To further bolster its revenues, the government also wants to lease out the operating of its motorways, which were built over the previous decade to boost tourism on the Adriatic coast but were financed by the government taking on huge foreign loans.
"All of this is being done with the aim of reducing our public debt," Linic said. ($1 = 5.7390 Croatian kunas)
(Editing by Susan Fenton)