UPDATE 1-UBS could afford to pay $5.5 bln in U.S. tax row

* Bank in no immediate need to rebuild capital ratios

* Tier 1 ratio improving as bank cuts risky assets

* Additional capital boost coming from Pactual sale

* Tax deal seen as positive, but problems remain (Adds comment from UBS in paragraph 14)

By Lisa Jucca, European Wealth Management Correspondent

ZURICH, July 8 (Reuters) - Swiss bank UBS (UBSN.VX) may be able to pay up to $5.5 billion to end a damaging U.S. tax dispute without needing an immediate cash injection, thanks to a recent capital increase and proceeds from asset sales.

U.S. authorities have accused UBS (UBS.N) of helping wealthy Americans hide $15 billion of untaxed money and are trying to force it to hand over 52,000 client names.

A court hearing is due on Monday and UBS may end up paying large amounts to end the row.

UBS announced late in June it had raised 3.8 billion Swiss francs ($3.5 billion), improving its Tier 1 capital cushion to 11.9 percent of risk-weighted assets, or an estimated 33 billion Swiss francs, from 10.5 percent on March 31.

But UBS said its Tier 1 ratio would likely already be above 12 percent as it has cut risk-weighted assets from nearly 277.8 billion Swiss francs on March 31.

BZ Bank analyst Matthias Duerr said a fine of 5 billion Swiss francs ($4.59 billion), the top of the range of what Swiss media have said UBS may pay, would cost about 200 basis points, or 2 percentage points, thus keeping UBS above the 10 percent Tier 1 ratio benchmark.

"The capital cushion of the bank would be gone, but they would not need immediate further capital," Duerr said.

Analysts see a Tier 1 ratio of 10 percent as the minimum for a solid capital base. Although such a level would be comparable with Deutsche Bank's (DBKGn.DE) 10.2 percent, UBS' capital base would look weak in comparison to a Tier 1 ratio of more than 14 percent at rival Credit Suisse (CSGN.VX).

But UBS is under little pressure to rebuild its Tier 1 ratio as Swiss financial regulator FINMA has given the two Swiss banks until 2013 to further boost their capital base.

Other analysts say that depending how the fine is calculated, UBS could have room for an even higher fine.

"In the case of a pre-tax payment of $1 billion, the resulting impact on the Tier 1 ratio would be 28 basis points," said Commerzbank analyst Michael Dunst, who expects UBS had a Tier 1 ratio of 12 percent at the end of the second quarter.

This would mean 140 basis points for a $5 billion payment.

A third analyst said UBS could afford to pay a fine of even 6 billion Swiss francs ($5.51 billion) if it was to be calculated on a pre-tax basis.

A spokesman for UBS said speculations about potential settlement payments in the U.S. tax dispute were "completely unfounded" and said there was no connection between the June 25 capital hike and the ongoing row.

CAPITAL EFFORTS

UBS Chief Executive Office Oswald Gruebel, who was appointed in February to turn around the crisis-hit Swiss wealth manager, has made strengthening the bank's capital base a priority.

In a June 25 update to its current trading performance, UBS predicted a second-quarter loss, but said this would stem from losses to own credit that do not eat into Tier 1 ratios.

UBS also said its Tier 1 ratio would benefit from a reduction in risk-weighted assets.

The bank cut risk-weighted-assets by about 9 percent in the fourth quarter of 2008 and by 8 percent in the first quarter of 2009, but analysts are sceptical it could keep this pace.

DZ Bank's Duerr said he forecast the assets to have dropped to 265 billion francs while another analyst said the drop could be around 2 percent, or about 272 billion francs.

A fall in these type of assets boosts the bank's Tier 1 ratio, which is calculated as a percentage of the assets.

UBS said it will also have a 50 basis points boost from the sale of Brazilian unit Pactual for $2.5 billion earlier this year, which is due to close in the third quarter.

Analysts expect a resolution to the U.S. tax litigation to help UBS stem billions of francs of wealth management client money withdrawal it has been suffering since coming into the spotlight in the financial crisis.

UBS shares, now hovering at 12.8 francs, or the mid-point between their six-month high of 17.2 and a multi-year low of 8.2 francs in March, are expected to rise in the short-term.

"We believe that a resolution of the U.S. tax issue could support a reversal of net outflows into net inflows," Commerzbank's Dunst said, who maintains a cautious "hold" rating on UBS and says he prefers Deutsche Bank and Credit Suisse.

But the end of the tax dispute may not be the end of UBS' problems as the bank has yet to prove it can be profitable.

And even though Swiss regulators may not urge UBS to rebuild its capital as yet, the bank, which has already got state aid, is expected to come under pressure to raise more cash later on.

"A settlement in the U.S. tax litigation would be a good signal for UBS shares in the short-term, but problems still remain," said Sebastien Lemaire, a bank analyst with Natixis. (Editing by Sitaraman Shankar)