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UPDATE 4-RBS hits milestone with Direct Line listing

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* RBS sells 30 pct of Direct Line at 175p per share

* Raises $1.3 bln from sale of 450 mln shares

* Retail investors take up 15 percent of offer

* Shares trading at 184p, 5 percent above IPO price

(Adds comments from equity capital banker)

By Matt Scuffham and Kylie MacLellan

LONDON, Oct 11 (Reuters) - Insurer Direct Line madea solid stock market debut on Thursday, marking a milestone inparent Royal Bank of Scotland's (RBS) recovery efforts.

Strong demand from the general public helped RBS raise 787million pounds ($1.3 billion) through the sale of almost onethird of Direct Line's shares, which were trading above theoffer price by early afternoon.

RBS has to sell all of Direct Line - whose TV adverts havemade its four-wheeled red phone motif a well-known corporatesymbol - as a condition of a government bailout during the 2008financial crisis that left it 82 percent state-owned. It willsell more shares next year and in 2014.

The bank said on Thursday the sale was the next importantstep in its recovery plan, having earlier this year finishedpaying back emergency loans to Britain and the United States. Itis also poised to exit a government insurance scheme later thisyear.

Priced at 175 pence per share, near the middle of the rangeRBS set in September, the listing values the business at 2.6billion pounds ($4.2 billion).

Its shares were trading 6 percent higher by 1205 GMT, a firmperformance which also marked a recovery for initial publicofferings (IPOs) in Europe after a dearth of new listings.

Germany's third-biggest insurer Talanx AG hasperformed well after its IPO last week, with its shares trading8 percent above the offer price.

RBS had been under pressure to secure a good price forDirect Line, with taxpayers sitting on a loss of 21 billionpounds after Britain pumped in 45 billion to rescue the bank.

Analyst Eamonn Flanagan at brokerage Shore Capital said theoffer price was a "reasonable outcome", although the company'svalue is below the cut-off point of about 3 billion pounds forinclusion in Britain's elite FTSE 100 share index .

STRONG DEMAND

The IPO was the biggest share offering to the general publicin Britain since money manager Hargreaves Lansdown Plcfive years ago.

Direct Line Chief Executive Paul Geddes said individuals hadbought between 5,000 pounds and 6,000 pounds worth of shares onaverage, and had taken up 15 percent of the shares sold.

Demand was helped by the strength of Direct Line's brands,which also include Churchill, Privilege and the Green Flagroadside recovery service and are instantly recognisable toBritish investors.

"Direct Line is a household name so it works well forretail. But there is always a downside involved in that if theshares perform badly, does it hit your business?," said oneequity capital markets banker.

The insurer has also pledged to pay up to 60 percent of itsprofit in dividends to shareholders, giving its shares anestimated yield of about 7 percent, far exceeding lowsingle-digit returns on most bank savings accounts.

Earlier concerns investors might be deterred by a Britishanti-trust inquiry into potential over-charging in the carinsurance market, in which Direct Line is the biggest player,turned out to be unfounded.

Direct Line's IPO could encourage other companies alreadyconsidering a London listing to selling shares to the public.Santander UK is expected to split from its Spanish parent andlist next year, while new bank Metro is planning an IPO in 2014.

But bankers said it was unlikely to prompt a rush of newlistings, as many of the larger companies which join the LondonStock Exchange come from emerging markets and are not well-knownnames in Britain.

Direct Line's listing marks a rare pay day for investmentbanks, and comes after the collapse on Wednesday of a proposed$45 billion merger between British defence group BAE Systems

and EADS .

European investment banking fees so far this year havefallen to levels not seen since 2002, according to ThomsonReuters data, as the euro zone debt crisis deters companies fromstriking deals.

Goldman Sachs and Morgan Stanley ran theDirect Line offering, acting as joint bookrunners along with UBS. They are in line to share fees of as much as 17.4million pounds with the other eight banks involved in the saleof shares to institutional investors.

($1 = 0.6242 British pounds)

(Additional reporting by Myles Neligan; Editing by EricaBillingham)

((matthew.scuffham@thomsonreuters.com)(02075426734)(Reuters

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

Keywords: DIRECTLINE IPO/