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UPDATE 1-Direct Line IPO price priced at 175 pence per share

* RBS to sell 30 percent of Direct Line shares

* RBS to raise 787 mln pounds from sale

(Adds details) By Matt Scuffham and Myles Neligan

LONDON, Oct 11 (Reuters) - Royal Bank of Scotland set a price of 175 pence per share for the London listing of British insurer Direct Line , close to the middle of the range originally set and valuing the business at 2.6 billion pounds ($4.2 billion).

RBS said on Thursday it would sell 450 million Direct Line shares, representing 30 percent of the business, with a 15 percent over-allotment option.

It will raise 787 million pounds from the sale, prior to the exercise of that option.

RBS is selling Direct Line in return for winning approval from European Union regulators for a bailout by Britain during the 2008 financial crisis that left it 82 percent state-owned.

The price was near the midpoint of the 160-195 pence range set by the British bank when it launched the initial public offering (IPO) on Sept. 28.

RBS has been under pressure to secure a good price for the business, with taxpayers sitting on a loss of 21.5 billion pounds after Britain pumped in 45 billion to rescue the bank.

RBS said it would continue to hold a 65.3 percent stake in Direct Line, assuming the overallotment option was taken up.

Trading in the shares will begin at 0700 GMT on Thursday.

($1 = 0.6242 pound) (Editing by Dan Lalor)

(matthew.scuffham@thomsonreuters.com; 02075426734; Reuters Messaging: matthew.scuffham.reuters.com@reuters.net)

Keywords: DIRECTLINE IPO/