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* Barclays must raise about 7 bln stg to meet demand
* 5 billion pound rights issue to be announced as early asTuesday
* Price will be at "significant double digit discount"
* Convertible bonds also seen as likely
* Barclays' share sale could dent plans for Lloyds stakesale
* Shares in Barclays down 3.5 percent
By Matt Scuffham, Tommy Wilkes and Sophie Sassard
LONDON, July 29 (Reuters) - Barclays is planning toissue about 5 billion pounds of new shares to help plug a 7billion pound capital shortfall triggered by new UK regulatorydemands, two sources familiar with the matter told Reuters.
Barclays said on Monday it had been in talks with Britain'sfinancial regulator and would update the market on its capitalplans when the bank publishes half-year results on Tuesday. Twosources told Reuters the update would include the announcementof a 5 billion pound share sale.
The sources said the sale will be done as a rights issue, where existing investors are given the opportunity to buy newshares so their stakes will not be diluted.
One source familiar with the matter told Reuters the shareswould be offered at a "significant double-digit discount" toBarclays' closing price of 308 pence, as is the convention inthe UK. Barclays declined to comment.
Since the shares are sold to existing investors, thediscount only matters if investors do not take up all of theirallocation and the shares are then sold to outsiders. Suchrights issues typically take between six to eight weeks tocomplete in the UK.
Barclays' shares fell as much as four percent on Monday onreports that the bank would issue new equity. The bank was thebiggest faller in Britain's FTSE 100 share index. Barclays'stock has more than doubled in value over the past 12 months.
Barclays and other European banks are under pressure tocomply with new regulation to constrain the industry'srisk-taking that could prevent a re-run of the taxpayer bailoutsthat followed the financial crisis.
Regulators' new focus is on banks' leverage ratios, which donot rely on banks' own risk assessments but express a bank'scapital as a proportion of its overall assets.
This has raised the stakes for banks across Europe. DeutscheBank is expected to unveil plans to shrink itsbalance sheet when it reports second-quarter results on Tuesday.
Barclays needs about 7 billion pounds to lift its leverageratio to a 3 percent minimum demanded by the UK regulator froman estimated 2.5 percent, taking into account future losses onbad loans and mis-selling compensation.
Two of the people familiar with Barclays' plans said thebank's efforts were also likely to include convertible bonds,bonds that convert into equity if a bank's capital falls below atrigger point.
Barclays declined to comment further on its plans. ThePrudential Regulation Authority (PRA) also declined comment.
HANDS TIED
One of Barclays biggest 20 investors told Reuters he had notbeen contacted about any capital raising plans.
"I'm not hugely happy about it but it's been enforced uponthem. Does the bank definitely need this extra capital? Probablynot. But if the PRA says it, then the bank's hands are tied,"the investor said.
A sale of new shares by Barclays, meanwhile, could dent theBritish government's chances of offloading around a quarter ofits 39 percent stake in Lloyds Banking Group, worthabout 5 billion pounds, later this year.
The Lloyds sale was expected in September or October,according to sources with knowledge of government thinking.
"If Barclays taps the market for 4 billion pounds of newbank equity, then it might take out some of the firepower aheadof Lloyds share sales later in the year," the investor said.
Barclays' plans could be determined by how much time it isgiven by the regulator to meet the leverage ratio target. It isexpected to be given until the end of 2014 but a tighterdeadline would make a sale of new shares more likely.
Sources familiar with the matter said last week that arights issue was an option for Chief Executive Antony Jenkins,but not his preferred route. But Jenkins has remained in talkswith regulators about how to hit the target over recent days andan equity fundraising has become more likely.
The bank has to make sure any bonds it sells would help itsleverage ratio under the UK rules. To do this, the bonds wouldhave to count towards Tier 1 capital, the key measure of abank's financial strength. Similar bonds Barclays has sold,known as CoCos, have been classed as Tier 2 capital.
