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UPDATE 2-UniCredit may sell more of its stake in online broker FinecoBank

Valentina Za

* Could reduce current 35 pct holding shortly

* Sold 30 pct stake in Fineco in 2016 to beef up capital

* Fineco is "profitable, well-run" asset - analyst (Adds details)

MILAN, May 7 (Reuters) - Italy's biggest bank UniCredit said on Tuesday it could further reduce its stake in online banking unit FinecoBank, a prized asset whose sale would help to buttress the group's financial strength.

The surprise announcement comes after UniCredit took a hit on its Turkish assets last year and paid to settle an Iran sanctions case with Washington, ending 2018 with a core capital ratio of 12.07 percent, down from 13.6 percent a year earlier.

UniCredit stands to make a big capital gain on its 35.35 percent stake in Fineco, which has a market value of 2.4 billion euros ($2.7 billion) and a book value of just 981 million euros.

Russell Quelch, financials analyst at Redburn, said the plan could revive concerns over capital pressure on the bank.

"However, this decision does seem more strategic than forced as UniCredit are currently on course to meet management capital targets" of a 2019 core capital ratio of 12-12.5 percent, he added.

Under a set of measures approved to ensure Fineco would not be penalised by a sale, UniCredit would provide a financial guarantee to allow Fineco to gradually eliminate by 2024 an 8.3 billion euro portfolio of UniCredit bonds it currently holds.

Fineco would continue to replace the UniCredit bonds with government bonds as they came to maturity. In the meantime, the guarantee would allow Fineco to continue not having to set aside any capital to offset its exposure to UniCredit, even if they were no longer part of the same group.

"This agreed arrangement would allow UniCredit to seize any market opportunity in relation to Fineco, including in the short term," UniCredit and Fineco said in a joint statement.

UniCredit is under pressure to lift revenues after focusing on cost cuts in recent years.

Like other Italian banks, it is suffering from political instability in the euro zone's third-biggest economy, whose populist government is struggling to kick-start growth.

"Fineco is a profitable, well run, successful and low capital intensive business, which also enjoys ... (higher valuation) multiples than UniCredit," Citi analysts said in a note.

Though the stake sale is expected to weigh on Fineco shares, a split from UniCredit would be positive in the long run for the business, which currently enjoys limited synergies with the rest of the group, analysts said.

"We believe that a fully independent Fineco can accelerate its organic growth," Citi said.

Newspaper Il Sole 24 Ore said on Tuesday UniCredit could sell 10-15 percent of Fineco. UniCredit declined to comment.

CEO Jean Pierre Mustier started reducing the bank's stake in Fineco upon his arrival at UniCredit in mid-2016 with a mandate to beef up the lender's capital strength and turn it around.

Mustier sold a 10 percent stake in Fineco for 328 million euros in July 2016 and a further 20 percent for 552 million euros in October of the same year.

The French investment banker, who analysts think has been preparing UniCredit for a merger by selling off bad loans and raising capital, will present a new business plan in December.

UniCredit is at the centre of intense speculation on cross-border mergers as a potential suitor for Commerzbank following the collapse of the German bank's merger talks with Deutsche Bank.

Analysts, however, said the Fineco sale appeared unrelated to any wider deal-making due to its relatively small size.

($1 = 0.8920 euros) (Additional reporting by Helen Reid in London; Editing by Mark Potter)