UPDATE 1-UK owners grumble as miss out on Santander issue

* Santander excludes UK private investors from rights issue

* Bank will sell entitlement and pass on proceeds

* UK shareholder group says sets "very dangerous precedent"

By Steve Slater and Raji Menon (Adds details from Santander, investor comment)

LONDON, Nov 20 (Reuters) - Santander (SAN.MC) shocked investors on Thursday by excluding private UK shareholders from its 7 billion euro ($8.84 billion) rights issue.

The Spanish bank said it had written to its 1.8 million private shareholders in Britain to tell them they could not take up their rights due to time and logistical constraints, setting what one investor group called a "very dangerous precedent."

"All shareholders should be treated equally and this is a very dangerous precedent," Roger Lawson, a spokesman for the UK Shareholders Association (UKSA) said.

Instead of opening the sale for UK private shareholders, Santander plans to sell their entitlements in the market and pass on any proceeds in cash.

Ignoring investor pre-emption rights -- which offers existing investors first right of refusal on new shares -- has become a hot topic in Britain, as investors have reacted angrily to a fundraising plan by Barclays Plc (BARC.L), which offers more attractive terms to Middle East investors.

Santander's letter said it could not extend the offer to private investors due to the short timetable for rights issues in Spain and the logistics involved in taking instructions from investors who hold shares through a UK nominee account.

The bank said it will pay the nominee costs in respect of the sale of the rights but the brokerage fees and any other charges, such as currency conversion, will be deducted from the proceeds of the sale. They can buy more Santander shares without paying brokers' fees, it said.

The average holding of private UK investors is 100 shares, worth just over 500 euros at current prices.

Europe's second-biggest bank has a large shareholder base in Britain following its purchases of Abbey National and Alliance & Leicester, which both had big numbers of small investors as they were previously building societies.

Santander unveiled the rights issue on Nov. 10 and aims to complete it by Nov. 27. (Reporting by Steve Slater and Raji Menon; Editing by David Cowell)