UPDATE 1-Carlyle exits HDFC stake in India with $841 million sale-source

* Deal is fourth-largest equity sale this year in India

* Sale marks Carlyle's exit from Indian mortgage lender

* Transactions rise in line with Indian market's surge

(Adds details, HDFC share price)

By Sumeet Chatterjee and Indulal PM

Oct 5 (Reuters) - Carlyle Group LP has raised $841 million in India's fourth-biggest equity deal this year by selling its remaining 3.7 percent stake in the country's top mortgage lender, Housing Development Finance Corp Ltd (HDFC), said a source with direct knowledge of the deal.

The sale marks the U.S. private equity firm's exit from HDFC

after nearly doubling its original 2007 investment of $650 million with this latest sale and one in February that raised $270 million.

The HDFC share sale came after a slew of such transactions in the Indian market since the beginning of 2012 as investors took advantage of stock market gains to reduce their holdings or take profit out of their India portfolio companies.

India's benchmark stock market index is up nearly 23 percent so far this year.

The index dropped nearly 25 percent in 2011, making it one of the worst global performers and leaving few options for private equity firms to exit their portfolio companies through IPOs or block deals.

Carlyle sold 57 million HDFC shares at 761.42 rupees each, said the source, declining to be named as details of the deal have not yet been released. The sale price represents a discount of 3.5 percent to HDFC's Thursday close.

Buyers of the HDFC shares included a clutch of overseas and Indian institutional investors, the source said, declining to give details.

Officials from both Carlyle and HDFC declined to comment on the deal.

HDFC shares, which the market values at about $22 billion, were trading down 5 percent at 749 rupees at 0517 GMT, while the Mumbai market was down 0.8 percent. HDFC stock is up about 15 percent so far this year.

Carlyle, which had raised about $270 million in February by selling a quarter of its stake in HDFC, launched the latest stake sale on Thursday in a price band of 760 rupees to 781.25 rupees a share.

The private equity firm, which manages about $156 billion globally, owned 5.2 percent of HDFC and was its second-largest shareholder before its February's stake selldown.

Citigroup , which topped the India equity market league table in the January-September period with a 43 percent market share, was the sole bookrunner for Carlyle stake sale.

Investment banks in India have been betting on sale of large blocks of shares by institutional investors this year to bolster underwriting fees that had been badly hit by fewer large IPOs and follow-on share sales in Asia's third-largest economy.

Total proceeds from share sales in India in the first nine months of 2012 were $8.9 billion from 59 deals, a rise from $8.3 billion in the same period last year, according to Thomson Reuters data.

Earlier this year, Malaysia's state investment arm, Khazanah Nasional, sold shares worth about $105 million in lender Yes Bank . Others such as Warburg Pincus and Temasek Holdings Pvt Ltd have also cut their stakes in Indian financial companies.

(Editing by Matt Driskill)


Messaging: sumeet.chatterjee.thomsonreuters.com@reuters.net))