* Bank to sell more than expected 25 pct -sources
* IPO priced at 260 pence per share vs 220-290 range
* Values TSB at 1.3 bln stg, 0.8 times book value
* At least a quarter of shares sold to retail investors
* Sale at least 10 times oversubscribed -sources (Adds IPO price, size of stake to be sold)
By Matt Scuffham
LONDON, June 19 (Reuters) - Britain's Lloyds Banking Group has increased the number of TSB shares it is sellingfollowing strong investor demand for the stock market listing,sources familiar with the matter said on Thursday.
Lloyds, which was ordered to divest 631 branches by Europeanregulators, will sell a 38.5 percent stake in the rebranded TSBbusiness on Friday, the sources said. It had originally plannedto begin the disposal by selling only a quarter.
The shares will be sold at 260 pence each, towards the upperend of the 220-290 pence range the bank had set. That values thebusiness at 1.3 billion pounds ($2.2 billion), about 0.8 timesits valuation on Lloyds' books.
The initial public offering (IPO) has attracted interestfrom investors in Britain, the United States and Asia, thesources said, including both private retail investors andfinancial institutions such as pension funds and insurers.
Sources familiar with the matter said demand for the sharesoutstripped the amount on offer by more than 10 times. At leasta quarter of the shares will be sold to retail investors, thesources said.
The valuation is lower than the 1.3 times net asset value atwhich Lloyds itself trades, but it is ahead of the 0.7 multipleof rivals Barclays and Royal Bank of Scotland,based on their current share prices.
Lloyds, which is 25 percent owned by the government, wastold by European competition regulators to sell the branches asa condition for approval of state aid received by the bankinggroup during the 2008 financial crisis.
CREDIBLE COMPETITOR
Lawmakers are keen for new challengers to emerge to breakthe dominance of Britain's "Big Four" lenders, includingBarclays, RBS and HSBC.
The re-emergence of TSB after it disappeared from Britain'shigh streets in the 1990s is expected to create a crediblecompetitor.
TSB has a head start over other new players, with 4.5million customers and 6 percent of Britain's bank branches. Butit has only a 4.2 percent share of the personal current accountmarket and has said it will take four to five years to hit its 6percent target.
Lloyds is expected to sell the shares in three stages,employing a similar strategy to that of RBS when it sold itsDirect Line insurance business, with each tranche priced higherthan the previous sale.
The European Commission's original sale deadline of November2013 had to be extended to the end of 2015 after the collapse ofa planned sale to the Co-operative Bank, which sparked aparliamentary inquiry and inflated the cost of the sale processto 1.6 billion pounds.
CARNEY BOOST
The success of the listing comes after investor interest inBritish flotations had cooled in recent weeks. Clothing chainFat Face pulled its planned listing last month, while shares ininsurance-to-holidays firm Saga have fallen belowtheir issue price.
Industry sources say that a successful sale will dependlargely on the performance of the stock in its first days oftrading. Lloyds and its advisers will be looking for a strongshowing to smooth the path for future share sales.
Though the IPO has attracted investors looking to tap intoBritain's economic recovery through a bank that is untainted bythe scandals that have dogged the sector since the financialcrisis, banking industry sources said that some had neededconvincing after TSB indicated that initiatives to win newcustomers would rule out dividend payments until 2017.
Demand received a timely boost from comments by Bank ofEngland Governor Mark Carney last week, who indicated that UKinterest rates could rise sooner than financial markets expect,potentially boosting TSB's profitability.
TSB could be the first of a number of British banks to liston the London Stock Exchange over the next two years. Bankingsources say that fledgling lender Aldermore is considering alisting this year and that Virgin Money and Santander UK couldfloat next year, followed by Williams & Glyn, which is beingspun out of RBS, in 2016.
The government also plans to sell its remaining 25 percentstake in Lloyds before the next election in May 2015. (Editing by David Goodman and Jane Baird)