UPDATE 1-UK fund star Woodford dumps HSBC on banking fine fears

* Says Libor, FX probes could expose HSBC

* Fears a substantial fine could hamper dividend growth

* Sells his fund's entire stake in HSBC (Adds details, background)

By Sudip Kar-Gupta and Nishant Kumar

LONDON, Sept 1 (Reuters) - Star British fund manager NeilWoodford sold his fund's stake in HSBC last month,citing concerns about the potential impact of severalindustry-wide investigations on the banking group.

Woodford's sale comes after banks in Europe and the UnitedStates have been fined for a variety of transgressions asregulators increase their scrutiny of financial institutions.

"I am worried that the ongoing investigation into thehistoric manipulation of Libor and foreign exchange marketscould expose HSBC to significant financial penalties," Woodfordsaid in a blog posting on his fund's website.

"Not only are these potentially serious offences in the eyesof the regulator, but HSBC is very able to pay a substantialfine," said Woodford, who built a near cult-like status duringmore than 25 years at Invesco Perpetual.

Investors pay close attention to the bets of high-profilefund managers such as Woodford, who left Invesco Perpetual inApril to set up his own fund.

Woodford generated a return of more than 2,200 percent forthe Invesco Perpetual High Income Fund, while the FTSE All-ShareTotal Return index rose 868 percent during the same period.

CF Woodford Equity Income Fund had 2.68 percent of its 2.4billion pounds of assets in HSBC shares at the end of July,according to the fund's factsheet. That meant the stake wasworth 64.3 million pounds ($106.9 million) at the end of Julyand was the fund's biggest financial sector holding.

HSBC shares, which opened down 0.2 percent, extended theirfall to 1.4 percent after Woodford's blog post. The shares weretrading down 0.8 percent at 1029 GMT on Monday. By comparison,Britain's FTSE 100 was down 0.1 percent.

The London-based fund manager said the size of any potentialfine was an unquantifiable risk.

"A substantial fine could hamper HSBC's ability to grow itsdividend, in my view. I have therefore sold the fund's positionin HSBC, reinvesting the proceeds into parts of the portfolio inwhich I have greater conviction," he said.

Companies that have gained Woodford's favour recently areAstraZeneca, BAe Systems, Drax Group and Legal & General, according to the blog.

HSBC shares, a consensus buy for analysts, are trading at1.1 times book value, above 0.9 times for European banks,according to data from Thomson Reuters StarMine.(1 US dollar = 0.6018 British pound) (Editing by Simon Jessop and David Clarke)