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UPDATE 3-Russia hit by second bailout as B&N Bank seeks central bank aid

* B&N is Russia's 12th biggest lender by assets

* Russia rescued another bank three weeks ago

* Sector under pressure from bad debt, regulation

* Analysts do not see risk of sector-wide crisis (Updates with statement from bank, quotes)

MOSCOW, Sept 20 (Reuters) - Russia's B&N Bank, the country's 12th biggest lender by assets, has sought a bailout from the central bank, just three weeks after another leading Russian bank had to be rescued.

There was no immediate sign of market contagion on Wednesday as Russia's central bank confirmed it was in talks with B&N's owners and would decide on a bailout in the near future.

The huge state banks that dominate the sector in Russia are solid, while the problems which have triggered crises at B&N and previously at Otkritie bank are likely to be contained within a handful of private lenders, market insiders said.

B&N Bank, which is controlled by Russian oligarch Mikhail Gutseriev and is not on the central bank's list of systemically important lenders, said it had under-estimated the problems within the banks it had bought during an expansion drive.

"Our objective is, with the support of the central bank ... to conduct an effective financial rehabilitation of the bank," said Mikail Shishkhanov, who was named as chairman of B&N Bank, whose assets account for 2 percent of the Russian banking system, according to ratings agency Fitch.

Russian banks, which were already under stress from an economic slowdown made worse by Western sanctions, have seen bad debts rise over the past three years.

The financial health of some worsened after the central bank forced them to make more rigorous provisions for non-performing loans, while margins have tightened due to lower interest rates.

The central bank took over Otkritie, Russia's largest private lender, last month and said it may need up to $6.9 billion, the biggest ever bailout in the country.

B&N Bank staff declined to comment outside its head office, three kilometres (1.9 miles) from the Kremlin, while a truck belonging to a firm called Shredder Express, which offers mobile document shredding, was parked on a private road in front.

LIMITED FALLOUT

Russia's composite financial sector stock index was down 0.9 percent at 0945 GMT, underperforming the broader index of Russian stocks, after B&N Bank's bailout news.

The Russian rouble firmed, adding 0.4 percent to 57.9 versus the dollar and gaining 0.3 percent to 69.54 against the euro.

This muted response was because the problems are within a small number of mid-sized private banks which are parts of struggling wider business groups, pursued rapid expansion, and lent to high-risk businesses such as real estate, analysts said.

The central bank also has the resources to step in if the others fail, stopping a wider contagion, they added.

Kirill Lukashuk, senior director at Russian ratings agency ACRA, said that wider risks stemming from B&N Bank's difficulties depended on the form of central bank bailout.

If it is along the same lines as Otkritie rescue, with senior creditors protected and no freeze on deposit withdrawals, "the effect on the market will be extremely limited".

TAKEOVER TROUBLES

B&N Bank, founded in 1993, is part of a sprawling conglomerate controlled by Gutseriev and his family that includes oil firms, a property development portfolio and an electronics retailer.

The bank embarked on an expansion drive after 2010, buying smaller lenders including Moskomprivatbank, Rost Bank, SKA-Bank before completing its biggest deal in 2016, a merger with MDM Bank, one of Russia's largest lenders.

Fitch said last month that the bank was one of a handful of Russian lenders, including Otkritie, that had seen "an outflow of interbank funding" in the first few months of the year.

Shishkhanov stepped down as B&N Bank chairman in May this year, handing over the role to Gutseriev, who is also his uncle.

On Wednesday, Shishkhanov said he had decided to take over the role again to work with the central bank, saying in a statement that problems at Rost Bank and MDM Bank "turned out to be much more serious than we had believed" in tough markets. (Additional reporting by Kira Zavyalova, Elena Fabrichnaya and Jack Stubbs; Writing by Christian Lowe; Editing by Alexander Smith)