UPDATE 2-No rise in German insurers' subprime risk-watchdog

(Adds industry comment, background, share price)

By Jonathan Gould and Philipp Halstrick

FRANKFURT Jan 22 (Reuters) - German financial watchdog BaFin and the country's insurers on Tuesday played down the risk of a ricochet from troubles at bond insurers in the United States that have kept insurance shares under pressure this week.

Germany's insurance regulator has been checking insurers' investments in complex financial instruments such as asset-backed securities as well as in hedge funds in the wake of global credit market turmoil unleashed last year by rising subprime mortgage defaults in the United States.

"The surveys up to now have shown that there is no increased risk for the insurance sector," BaFin told Reuters.

"We see the financial effects of the 'subprime crisis' on insurers as limited. This goes as well for risks from monoliners," it added, referring to difficulties at U.S. insurers specialised in insuring the structured finance products at the heart of the credit market problems.

Last week, the second-largest bond insurer in the world, Ambac ABK.N, lost a crucial top credit rating from Fitch for its main insurance unit. The world's biggest bond insurer, MBIA (MBI.N), has also been threatened with a ratings downgrade.

Credit ratings agencies were concerned about the risks the companies faced in products such as collateralised debt obligations (CDOs), whose values have been heavily hit in the subprime downturn.

Investors worry that a default of one of the monoline bond insurers could leave holders of CDOs and other bonds facing even larger write-downs than expected.

Shares in European insurers such as Germany's Allianz (ALVG.DE) have come under pressure in recent days on investor worries that the problems could spread to Europe.

ALLIANZ SHARES

Allianz shares, which had fallen more than a fifth this year, lagging the sector, rose 2 percent to 122.26 euros by 1616 GMT. The DJ Stoxx index of European insurers .SXIP gained 4.4 percent.

Allianz has declined to comment on bond-insurance exposure.

BaFin said it would continue to monitor closely any risks of spillover from the monoliners' problems.

German insurance industry association GDV joined BaFin in playing down the risks from the trans-Atlantic troubles, saying investors were over-reacting.

"Share price declines are hitting lots of branches but we think there is certain degree of overshooting when it comes to insurers," a GDV spokesman said.

The GDV said BaFin's surveys had shown how little German insurers had invested in the types of instruments that the monoliners were insuring.

"German insurers have not invested in any significant way in U.S. subprime assets," the spokesman said.

"We know that a maximum of 1.6 percent of (insurers') assets are invested in asset-backed securities, but the Bafin surveys showed that half of the companies active in this area had no subprime investments at all," he added. (Editing by Paul Bolding)