RPT-UPDATE 1-Direct Line narrows IPO price range - sources

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* IPO price range narrowed to 170-177.5 pence - sources * RBS will sell a minimum 30 percent stake - sources By Matt Scuffham and Kylie MacLellan

LONDON, Oct 9 (Reuters) - Royal Bank of Scotlandplans to price the stock market listing of its Direct Lineinsurance business at between 170 pence and 177.5p, in the lowerhalf of its initial range, sources close to the transaction toldReuters.

The British bank, which is 82 percent owned by thegovernment following a 2008 bailout, had initially set a pricerange of between 160p and 195p, but this has been narrowed aheadof the offer closing on Wednesday.

RBS will sell at least 30 percent of its shares, the sourcessaid, meaning it will raise a minimum of 765 million pounds($1.2 billion). It had planned to sell between 25 percent and 33percent in the initial public offering (IPO).

RBS is selling Britain's biggest motor insurer to winEuropean Union regulatory approval for the bailout it receivedduring the financial crisis four years ago.

It has been under pressure to secure a good price for thebusiness to reduce the British taxpayer's loss, which stands at22 billion pounds on the 45 billion the government pumped intothe bank to secure its future.

At the bottom of the new range, Direct Line would have atotal value of 2.55 billion pounds.

Books for institutional orders close at 1600 GMT onWednesday. Final pricing is due to be announced on Thursday,when trading will begin. Order books for retail investors havealready closed and several brokerages reported strong demand.

"Since the weekend we've seen the demand for Direct Lineshares almost double," said Tim Archer, head of operations atbrokerage Redmayne-Bentley. RBS has not said what proportionwill be allocated to retail.

Under EU rules, RBS must sell the majority of its stake bythe end of 2013 and all of its shares by the end of 2014.

The Direct Line flotation comes amid signs of an upturn inthe IPO market in Europe.

Russian mobile phone operator MegaFon kicked off its Londonlisting on Tuesday, one of five planned London main market IPOswhich have launched since Direct Line began marketing its shareslast month.

($1 = 0.6251 British pounds)(Editing by David Holmes)


Messaging: matthew.scuffham.reuters.com@reuters.net))