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UPDATE 1-Icahn calls on eBay to sell 20 percent of PayPal in an IPO

(Adds details on Icahn's arguments, background)

March 19 (Reuters) - Activist investor Carl Icahn on Wednesday called on eBay Inc to sell 20 percent of its PayPal payments unit in an initial public offering, in his lattest missive to shareholders.

Icahn in January called for eBay to hive off its fast growing PayPal business, arguing the unit is undervalued as part of eBay. EBay did not respond to a request for comment, but the company has repeatedly said both businesses are better off together.

In recent weeks, Icahn has sent a series of open letters critical of eBay Chief Executive John Donahoe, the board, and corporate governance at the e-commerce company.

Selling off only part of PayPal would retain the benefits of a stand-alone PayPal while maintaining the efficiencies of having eBay and PayPal together, Icahn wrote in an open letter to fellow eBay shareholders.

As a public company, the payments firm should also command a higher valuation than as part of a larger corporation, shedding the "conglomerate discount," he said. Its stock could then also be used to bankroll future acquisitions.

"Conducting a 20% IPO of PayPal - and creating two dedicated and highly-focused independent businesses - will provide the best opportunity for these businesses to remain competitive over the long-term," said Icahn, who owns more than 2 percent of eBay.

EBay bought PayPal for $1.5 billion in 2002.

The billionaire said eBay and PayPal could enter into a long-term commercial contract that does not require eBay to own all of PayPal, to preserve their ties.

He also said PayPal has a significant opportunity to offer new services such as check writing and direct deposits.

A standalone PayPal and eBay would benefit from having their own independent management teams, Icahn argued.

PayPal needs to be independent to compete in the mobile payments industry, Icahn said, repeating an assertion he has frequently made in a series of open letters in recent weeks.

(Reporting by Phil Wahba in New York; editing by Andrew Hay)