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UPDATE 1-Australia's Woolworths to spin off properties, raise $510 mln -source

* Property fund worth more than A$1 bln - source

* Woolworths has been studying options for properties for months

* Move on properties follows sale of electronics units * Shares opener slightly firmer

(Adds detail, investor comment, share price)

By Narayanan Somasundaram

SYDNEY, Oct 4 (Reuters) - Australia's top supermarket operator Woolworths Ltd is set to spin off some of its property portfolio into a fund, as well as raise about A$500 million ($510 million) in equity as early as Friday, a source with direct knowledge said.

The property fund would be worth more than A$1 billion, the source said.

Woolworths and other Australian retailers have been hurt by rising competition from nimble online rivals and are looking at ways to cut costs and better use assets such as their properties.

"It's a good thing for Woolworths' shareholders," Simon Bonouvrie, portfolio manager at Platypus Asset Management, who expects the company to use the funds to pay down debt and open more stores.

"They have spent a significant amount on property development over the past several years and arguably they are not a natural property owner. So it's good that they can sell some property assets and recycle the capital back into their retailing business."

Citigroup is underwriting the equity raising and Woolworths is finalising the property funds structure in consultation with potential investors, said the source who declined to be named as discussions are not yet public.

No other details were immediately available.

Woolworths has previously said it was looking at several options including a sale or a separate listing of the property assets. It has sold property assets worth about A$500 million in the 2011 and 2012 financial years, based on stock exchange filings.

Company officials and a Citigroup spokeswoman in Sydney did not immediately respond to requests for comment.

Shares in Woolworths opened 0.8 percent higher on Thursday, having gained about 15 percent so far this year.

The company operates brands including discount retailer Big W, liquor chain Dan Murphy's and Masters Home Improvement in addition to its Woolworths supermarket chain which competes with Wesfarmers Ltd's Coles.

Last month Woolworths said it was selling its Dick Smith Electronics chain in Australia and its Indian wholesale venture to private equity firm Anchorage Capital Partners for a combined A$55 million under a plan to exit the consumer electronics segment.

Department store David Jones has also undertaken a review of its properties as it seeks to arrest a slide in its share price.

($1=A$0.9792)

(Additional reporting by Miranda Maxwell in Melbourne and Lincoln Feast in Sydney; Editing by Gyles Beckford and Edwina Gibbs)

((narayanan.somasundaram@thomsonreuters.com)(+61 2 93731815)(Reuters Messaging: narayanan.somasundaram.reuters.com@reuters.net))

Keywords: WOOLWORTHS PROPERTIES/