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UPDATE 1-Russia bank rescue eases market concerns about contagion

* Central bank bailed out top-10 lender Otkritie

* Russian banking second index rises on c.bank rescue

* Otkritie bailout reduces risk of contagion - analysts

* Markets were nervous about health of other banks (Updates throughout with new details, updates share prices)

MOSCOW, Aug 30 (Reuters) - A central bank rescue of Russian bank Otkritie has eased market concerns that other banks could be in trouble, prompting banking stocks to reverse three days of losses.

Russia's central bank stepped in on Tuesday to take at least a 75 percent stake in Otkritie, the country's biggest privately-owned bank, to plug a hole in its balance sheet.

It was the biggest Russian bank bailout since 2011, when the central bank stepped in to rescue mid-sized lender Bank of Moscow.

The bailout of Otkritie, Russia's seventh-biggest lender by assets, was the culmination of weeks of market concerns about liquidity problems involving a handful of Russian private banks, including Otkritie.

The swift action to rescue Otkritie has gone a long way to reducing the risks of broader contagion, financial analysts said.

"Everyone is breathing a sigh of relief. The panicky mood has been dampened down," Maxim Ryabov, a trader with Russian brokerage BCS, said.

The Moscow stock exchange's financial sector index was up 1.5 percent at 1300 GMT on Wednesday after falling for three days in a row.

Shares in Russia's second-biggest bank, VTB, which is a shareholder in Otkritie, were up more than 6 percent, after having fallen for several days.

"The central bank cannot really allow to create an aura of vulnerability around a major bank because there are other banks that are rumored to be in trouble," Lubomir Mitov, chief economist for Central and Eastern Europe at UniCredit, said.

"So they basically took the step to ensure that nobody loses their money," he said.

Investment analysts say Russia has too many small and mid-sized private banks and that some of them are beset with problems, including hidden non-performing loans and proprietors who use the banks as private piggy banks.

However, in certain respects Russia is less exposed to a systemic banking sector crash than some European Union countries were in the fallout from the 2008 world financial crisis.

In Russia, the top five banks are all state-owned and account for 55 percent of sector assets, according to Tim Ash, strategist at fund manager Bluebay. The state lenders pursue more conservative lending policies and are underwritten by the state, which has large coffers built up from selling oil.

Shares in Otkritie were down 2.46 percent at 1300 GMT. Yields on Otkritie bonds, which act as a gauge of the risk of owning the bank's paper, fell to 36 percent on Wednesday, from a record high of 82 percent hit shortly before the bailout on Tuesday.

CROSS-CONTAMINATION RISK

Credit rating agency Fitch had already flagged concerns over a number of Russia's banks which could have liquidity problems. In an Aug. 18 statement, Fitch mentioned Otkritie, B&N Bank, Promsvyazbank and Credit Bank of Moscow as being in that category.

Otkritie's peers in the Russian banking sector are potentially exposed to problems there because they hold that bank's bonds, and made loans to Otkritie on the interbank market.

The central bank said that Otkritie's obligations to creditors and holders of its Eurobonds would be honored, reducing the risk of a domino effect taking down other banks.

The central bank said though that Otkritie's subordinated bondholders could be forced to take a loss if Otkritie's capital adequacy is found to be below a certain threshold.

Promsvyazbank said it had no exposure to Otkritie on the interbank market and saw no risks to itself.

A spokeswoman for Credit Bank of Moscow said the bank had no risks at the moment related to Otkritie. B&N Bank did not immediately respond to a request for comment.

Shares in Credit Bank of Moscow were down 0.5 percent, Promsvyzbank shares rose 0.8 percent. The other bank mentioned by Fitch, B&N, is not publicly traded.

CONTAGION RISKS

Still, concerns remained that Otkritie might not be the last Russian bank to encounter trouble.

"The Otkritie situation is very specific and isolated. But given its importance it may have a negative contagion effect on other private banks. For contagion reasons I don't think volatility is behind us," said Anton Kerkenezov, a portfolio manager who helps oversee about $5 billion of emerging-market bonds at Aviva Investors in London.

The details of the rescue package announced by the central bank left a number of questions unanswered.

The 75 percent stake the central bank said it would take in Otkritie would be worth $51 billion, based on the current value of the 7 percent of the bank's shares that represent its free float on the Moscow Exchange. But the central bank is likely to pay much less for the shares held by investors.

In addition, the central bank has said it will provide financial support for Otkritie so it can keep operating, but it has not said how much.

Also unknown so far is the size of the hole in Otkritie's balance sheet. Otkritie had assets of 2.45 trillion roubles ($41.81 billion) in the second quarter of this year, according to data compiled by Interfax. The bank at the center of the previous biggest rescue, Bank of Moscow, had assets at the time of 900 billion roubles.

It is unclear who will be chief executive of Otkritie. Russia's Kommersant newspaper reported that discussions were under way with Mikhail Zadornov, a former finance minister who is now head of VTB retail unit VTB24.

Two people close to Zadornov told Reuters they doubted he would move to Otkritie. "Zadornov could, of course, make a last-minute decision, but I don't think he'll go," said one of the sources, who spoke on condition of anonymity.

For now, the central bank says it is installing a caretaker management for Otkritie, made up of existing managers and a team from the central bank. ($1 = 58.5951 roubles) (Additional reporting by Katya Golubkova and Gabrielle Tetrault-Farber in MOSCOW, Sujata Rao and Marc Jones in LONDON; Writing by Christian Lowe; Editing by Adrian Croft)