UPDATE 1-Shell to sell most of Woodside stake for $5.7 bln

* Shell to cut stake in Woodside to 4.5 pct

* Woodside to buy back $2.69 bln worth of shares

* Shell to focus on Gorgon, Prelude LNG in Australia

* Sale to institutions pitched at 3.5 percent discount

(Adds Shell comments)

MELBOURNE, June 17 (Reuters) - Royal Dutch Shell launched a long-awaited sale of most of its stake in Australia's Woodside Petroleum Ltd on Tuesday, looking to reap about $5.73 billion as it moves to focus on developing its own gas assets in Australia.

Woodside's top shareholder said it was cutting its stake to less than 5 percent from 23.1 percent, continuing a selldown it began in 2010. The latest share sale came as Woodside's stock hit a three-year high.

"Today's announcement is part of our drive to improve Shell's capital efficiency and to focus our Australia growth in directly owned assets," Shell Chief Executive Ben van Beurden said in a statement.

As part of the sale, Woodside said it would buy back 78.3 million of its shares from Shell for A$36.49 a share, or A$2.86 billion ($2.69 billion), which it was able to fund after pulling out of a planned investment in Israel's Leviathan gas project.

Shell also agreed to sell a further 78.3 million shares to institutional investors at A$41.35 a share, or A$3.24 billion. The offer to institutions represents a 3.5 percent discount to Woodside's last trade.

Shell's move had been expected this year after van Beurden took the helm in January outlining plans to sell $15 billion worth of assets and slash capital spending by a fifth.

The company said it would focus it efforts in Australia on its 25 percent stake in the massive Gorgon liquefied natural gas project and its Prelude floating LNG project, with other options for LNG growth in Australia, Indonesia and North America.

"It doesn't change our view of Australia as an important player on the global energy stage, or Shell's central role in the country's energy industry," van Beurden said.

Shell tried to take over Woodside in 2001 but was blocked by the Australian government following an aggressive lobbying campaign by Woodside, which argued that Shell may focus on offshore developments at the expense of Australian projects.

($1 = 1.0639 Australian Dollars)

(Reporting by Sonali Paul; Editing by Paul Tait and Edwina Gibbs)