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UPDATE 1-U.S. govt to sell most of Ally Financial stake

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March 27 (Reuters) - The U.S. government plans to sell the bulk of its stake in bailed-out auto lender Ally Financial Inc, to raise up to $2.66 billion.

A successful initial public offering will cut the U.S. Treasury's stake to 14.1 percent from 36.8 percent if underwriters exercise an option to sell additional shares.

The auto lender, bailed out in the 2008 financial crisis, will have a market valuation of about $13.5 billion at the top of the expected price range.

Reuters reported in February that Ally Financial was hoping for an IPO of as much as $4.5 billion in a deal that would allow the U.S. government to make a profit on its bailout.

The U.S. government injected $17.2 billion into Ally after the bank's Residential Capital mortgage unit suffered deep losses from home loans that went bad.

Ally initially filed for an IPO in March 2011, but the company delayed its plans several times due to market conditions and as it faced potential fines over its mortgage lending.

Ally, formerly known as GMAC, was the preferred lender for auto giants GM and Chrysler.

Citigroup, Goldman Sachs & Co, Morgan Stanley and Barclays are lead underwriters for the offering, Ally said in its regulatory filing with the Securities and Exchange Commission on Thursday. (http://link.reuters.com/qyd97v)

Ally will list on The New York Stock Exchange under the symbol "ALLY".

(Reporting by Tanya Agrawal and Aman Shah in Bangalore; Editing by Savio D'Souza)