Sale of German subprime victim IKB nears

FRANKFURT, July 2 (Reuters) - The saga of Germany's highest-profile casualty of the subprime crisis, IKB, is drawing to a close with a private equity firm emerging as front runner to buy the bank, sources with direct knowledge of the situation said on Wednesday.

IKB IKBG.DE, which nearly tipped Germany's financial system into crisis after the bank's subprime investments collapsed, has been up for sale since the start of the year.

It is controlled by the German government through state bank KfW [KFW.UL]. Together, they have shouldered the lion's share of the three rescue efforts that have cost 8.5 billion euros ($13.5 billion) in all.

Now its owners want to draw a line under the affair and hope to recover some of the money they lost by selling what is one of the most important lenders to Germany's medium-sized companies.

Sources close to the situation said that U.S.-based Ripplewood Holdings had made the most attractive offer for the Duesseldorf-based bank, whose market capitalisation is around 270 million euros.

Swedish bank SEB (SEBa.ST) and U.S. group Lone Star [LS.UL] are also in the running, the sources said.

Binding offers are due by July 17. A final decision on the sale, which had long been in doubt due to limited buyer interest, is due by September.

IKB became one of Germany's highest-profile casualties from the collapse in risky U.S. home loans after it piled up roughly 17.5 billion euros of subprime-linked investments.

Many Germans knew nothing of its involvement in the market and it panicked investors when its problems came to light almost one year ago.

Bank watchdog Jochen Sanio subsequently rallied the first of three rescues to head off what he said could have snowballed into the worst banking crisis in Germany in more than 75 years.

The credit crisis, which started when U.S. home owners were squeezed by falling property prices and rising interest rates, rocked the market for securitised debt and is now dragging down the global economy.

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(Reporting by Patricia Nann and Philipp Halstrick; Editing by Paul Bolding)