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RPT-UPDATE 1-Direct Line narrows IPO price range - sources

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* IPO price range narrowed to 170-177.5 pence - sources * RBS will sell a minimum 30 percent stake - sources By Matt Scuffham and Kylie MacLellan

LONDON, Oct 9 (Reuters) - Royal Bank of Scotland plans to price the stock market listing of its Direct Line insurance business at between 170 pence and 177.5p, in the lower half of its initial range, sources close to the transaction told Reuters.

The British bank, which is 82 percent owned by the government following a 2008 bailout, had initially set a price range of between 160p and 195p, but this has been narrowed ahead of the offer closing on Wednesday.

RBS will sell at least 30 percent of its shares, the sources said, meaning it will raise a minimum of 765 million pounds ($1.2 billion). It had planned to sell between 25 percent and 33 percent in the initial public offering (IPO).

RBS is selling Britain's biggest motor insurer to win European Union regulatory approval for the bailout it received during the financial crisis four years ago.

It has been under pressure to secure a good price for the business to reduce the British taxpayer's loss, which stands at 22 billion pounds on the 45 billion the government pumped into the bank to secure its future.

At the bottom of the new range, Direct Line would have a total value of 2.55 billion pounds.

Books for institutional orders close at 1600 GMT on Wednesday. Final pricing is due to be announced on Thursday, when trading will begin. Order books for retail investors have already closed and several brokerages reported strong demand.

"Since the weekend we've seen the demand for Direct Line shares almost double," said Tim Archer, head of operations at brokerage Redmayne-Bentley. RBS has not said what proportion will be allocated to retail.

Under EU rules, RBS must sell the majority of its stake by the end of 2013 and all of its shares by the end of 2014.

The Direct Line flotation comes amid signs of an upturn in the IPO market in Europe.

Russian mobile phone operator MegaFon kicked off its London listing on Tuesday, one of five planned London main market IPOs which have launched since Direct Line began marketing its shares last month.

($1 = 0.6251 British pounds) (Editing by David Holmes)

((matthew.scuffham@thomsonreuters.com)(02075426734)(Reuters

Messaging: matthew.scuffham.reuters.com@reuters.net))

Keywords: DIRECTLINE IPO/