* Cerberus to cut stake to 7.7 pct from 58 pct * Aozora shares plunge 10 percent * Cerberus reducing exposure to Japan By Emi Emoto and Taro Fuse TOKYO, Jan 7 (Reuters) - Cerberus Capital Management LP plans to sell up to 148 billion yen ($1.7 billion) ofshares in Aozora Bank Ltd in a global offering that theJapanese bank said would cut the U.S. buyout firm's stake to 7.7percent from 58 percent. Cerberus has been the controlling shareholder in mid-sizedlender Aozora for much of the past decade, but is in the processof cutting its exposure to Japan, where there are increasinglyfew distressed investment opportunities for foreign funds. In September, Aozora said Cerberus intended to reduce itsstake, but did not clarify at the time how the U.S. firm plannedto divest its holding. The New York-based private equity fundhas paid more than 101 billion yen for the 58 percent holding ithas been building since 2000. Shares in Aozora plunged 10 percent to 250 yen by the closeon Monday on news of the plan, as investors sold on fears thatan influx of Aozora shares onto the market would dilute thestock and send it lower. The drop wiped 45.8 billion yen($520.22 million) from the firm's market capitalization. Cerberus will sell 275 million shares in Japan and another275 million shares overseas. It may also sell up to 41.25million additional shares depending on the demand. An official at Cerberus' Tokyo office declined to comment. Citigroup Inc, along with Morgan Stanley MUFGSecurities Co, a joint venture between Morgan Stanley and Mitsubishi UFJ Financial Group, will serveas joint global coordinators of the sale, according to a filing. Other banks involved in the sale are Goldman Sachs Group Inc, Barclays PLC, and Daiwa Securities Group Inc, it said. Cerberus, named after the mythical many-headed dog thatguards the gates of the underworld, was co-founded by StephenFeinberg in 1992. Feinberg, a Princeton graduate, worked at bondtrader Drexel Burnham Lambert before launching the firm. One of the world's largest private equity firms, it led theill-fated investment into U.S. automaker Chrysler in 2007. The private equity fund bought Aozora, formerly known asNippon Credit Bank, after the bank was temporarily put undergovernment control during Japan's financial crisis in the late1990s, when several Japanese lenders struggled under the weightof bad loans. Cerberus bought a minority stake in Aozora in 2000, thenbecame its biggest shareholder in 2003 when Softbank Corp soldits 48.87 percent share to Cerberus for 101 billion yen. It tookthe bank public in 2006. Cerberus, known as a savvy if low-profile debt investor, hasgained attention recently for its interest in buying U.S.grocery chain Supervalu Inc, and its plans to sellgunmaker Freedom Group, whose Bushmaster AR-15 rifle was used inthe Connecticut school massacre last month. The Aozora sale would mark another exit from Japaneseinvestments for Cerberus, which plans to sell its holdings inSeibu Holdings, an operator of railways, resort hotels and realestate properties. It has hired investment banks to handle thatsale, sources told Reuters.