UPDATE 1-NZ's Vector to buy back 25 million shares

(Updates with background, adds share price)

WELLINGTON, Aug 1 - Vector Ltd VCT.NZ, New Zealand's largest electricity and gas distributor, said on Friday it would buy back up to 25 million shares, or 2.5 percent of its total share capital, to boost its returns to shareholders.

"Vector's board currently believes its shares are undervalued by the market and therefore represent an attractive risk-return proposition for its shareholders," Chairman Michael Stiassny said in a statement.

In April, Vector announced the sale of its Wellington electricity distribution network to Hong Kong's Cheung Kong Infrastructure (1038.HK) for NZ$785 million ($573 million), about NZ$195 million above book value.

It said the proceeds would initially be used to pay down debt, and it would be on the lookout for acquisition opportunities.

Shares in Vector, 75 percent owned by an Auckland-based consumer trust, last traded up 2.3 percent at NZ$2.23, having ranged between NZ$1.69 and NZ$2.65 over the past year.

Vector would continue to maintain a strong balance sheet to fund capital expenditure for security of supply and on-going growth initiatives, Stiassny said.

Vector reports its results on Aug. 27, and has previously said it is comfortable with analysts' forecasts of full year profit of NZ$150-165 million.

Vector has more than 20,000 kilometres (12,400 miles) of electricity networks and 10,000 kilometres of gas pipelines, as well as about 45 percent of the electricity metering market. ($1=NZ$1.37) (Reporting by Adrian Bathgate)