UPDATE 2-Direct Line shares rise on London debut

* Shares up 3 pct at London opening

* RBS sells 30 percent of Direct Line shares

* RBS raises 787 mln pounds from sale

* RBS must sell entire shareholding by 2014

* Retail investors take up 15 percent of offer

(Recasts with share opening, adds detail, background)

By Matt Scuffham and Myles Neligan

LONDON, Oct 11 (Reuters) - Shares in British insurer Direct Line opened 3 percent higher on their London Stock Exchange debut on Thursday after Royal Bank of Scotland (RBS)

said it had raised 787 million pounds ($1.3 billion) from the sale of 30 percent of the company's shares.

The initial public offering was priced at 175 pence per share, close to the middle of the range originally set and valuing the business at 2.6 billion pounds ($4.2 billion). The shares were trading at 181 pence in early deals.

RBS said 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.

There had been concerns that investor appetite for the initial public offering would be damaged by British anti-trust regulators investigating the car insurance market, due to suggestions that consumers were being overcharged.

However, analyst Eamonn Flanagan at brokerage Shore Capital said the price for Direct Line stock was a "reasonable outcome".

The sale benefited from strong demand from British retail investors, who have had few opportunities to participate in large-scale IPOs in recent years.

On a conference call with reporters, Direct Line Chief Executive Paul Geddis said retail investors had purchased between 5,000 pounds and 6,000 pounds worth of shares on average and had taken up 15 percent of the shares sold.

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

The price was near the mid-point of the 160 to 195 pence range set by the British bank when it launched the 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.

"This is another important milestone in RBS Group's restructuring plan," said RBS Finance Director Bruce Van Saun.

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

Under the EU directive, RBS must sell more than 50 percent of Direct Line by the end of 2013 and the rest of its holding a year later.

($1 = 0.6242 pound)

(Editing by Dan Lalor and David Holmes)


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