* U.S. probed sale of high-risk mortgage debt
* Credit Suisse to pay penalty of $5.3 bln
* Deutsche Bank hit with $7.2 bln penalty
* U.S. fines on toxic debt: http://tmsnrt.rs/2e7tTil (Adds details on state lawsuits)
By Michael Shields and Arno Schuetze
ZURICH/FRANKFURT, Dec 23 (Reuters) - Credit Suisse and Deutsche Bank have been hit with a combinedpenalty of more than $12 billion over the sale of U.S. toxicdebt, further hampering two of Europe's leading investment banksas they struggle with weak earnings.
The penalties stem from an initiative launched by U.S.President Barack Obama to pursue banks for selling sub-primedebt without warning of the risks, a practice that led to theworst economic crisis since the Great Depression.
Credit Suisse agreed to pay more than $5.2 billion in a dealwith U.S. authorities and the penalty is likely to push it to asecond consecutive annual loss.
The payment, to settle claims it misled investors whenselling mortgage-backed securities in the run-up to the 2008financial crisis, is split into two parts.
It will first pay $2.48 billion and laterprovide $2.8 billion over five years to offset the impact onconsumers, the bank said.
That news came after Deutsche Bank agreed to atotal $7.2 billion settlement for its pooling and sale of toxicmortgage securities, the settlement also divided in a similarmanner. The German bank had previously said that the U.S.Department of Justice was seeking twice that figure.
"I think the fines are reasonable and represent a positivefor the system," said Alberto Gallo, head of global macrostrategies at hedge fund Algebris Investments.
The penalties put the two European banks at a furtherdisadvantage to larger U.S. rivals, many of whom have alreadyabsorbed their own fines for such wrongdoing and have strongcapital cushions.
U.S. banks earlier paid $46 billion in such penalties.
DEUTSCHE SHARES RISE
Investors, who had feared an even bigger penalty forDeutsche, were relieved and its shares gained more than 2percent. They have risen more than 80 percent since hitting arecord low at the end of September on fears the bank would needto raise cash from investors.
"It's no great coup but the settlement reduces theuncertainty," said Ingo Speich, of Union Investment, a Deutschebank shareholder, adding that he did not expect the bank to sellmore shares to bolster its capital.
Credit Suisse, who people familiar with the matter earliertold Reuters had fought to soften its settlement, saw its sharesslip by more than 1 percent.
The final deal is in line with the $5 billion to $7 billionthe Justice Department had asked Credit Suisse to pay earlier innegotiations, as reported by Reuters on Monday.
Credit Suisse still faces state lawsuits filed by New Yorkand New Jersey over toxic mortgage securities. The states arestill pursuing their cases, Amy Spitalnick, a spokeswoman forNew York Attorney General Eric Schneiderman, and Lisa Coryell, aspokeswoman for New Jersey's attorney general, told Reuters onFriday in separate emails.
Banks typically have settled state cases over mortgagesecurities at the same time as federal claims, and it appears itwould be especially true for the New York case.
Schneiderman is co-chair of the joint federal-state workinggroup that Obama created in 2012 to hold banks accountable forthe misconduct at the heart of the financial crisis. When theNew York lawsuit was filed, it was billed as an enforcementaction that came out of the task force.
Credit Suisse declined to comment on the state lawsuits.
For the Justice Department matter, the bank said it wouldtake a pre-tax charge of approximately $2 billion in addition toits existing reserves against these matters in the final threemonths of 2016.
Analysts at regional bank ZKB said that the charge woulddepress the bank's leverage ratio from 3.4 percent to 3.1percent.
The U.S. authorities meanwhile sued Barclays onThursday over similar claims.
Barclays said on Friday that it rejected the complaint,would "vigorously defend" the case and sought its dismissal "atthe earliest opportunity". ($1 = 1.0250 Swiss francs)
(Additional reporting by Maiya Keidan, Arno Schuetze, KarenFreifeld, Kathrin Jones and Simon Jessop; Writing by JohnO'Donnell; Editing by Adrian Croft and Keith Weir)
Barclays (BARC)