UPDATE 1-Austria seeks Saturday talks on Hypo rescue

* Austria finmin invites Bavaria govt to Saturday talks

* Austria seeks capital, liquidity, risk cover for Hypo

* Hypo collapse could send ripples through Croatia, Serbia (Adds Austria finmin invites Bavaria, Chancellor Faymann)

By Boris Groendahl and Peter Maushagen

VIENNA/MUNICH, Dec 12 (Reuters) - Austria's Finance Minister invited his counterpart from the German state of Bavaria for Saturday talks on how to rescue Hypo Group Alpe Adria, Austria's sixth-biggest bank and a major lender in the former Yugoslavia.

The invitation followed talks that continued into early Saturday between ministry officials, the head of Hypo's main shareholder, Bavarian state bank BayernLB [BAYLB.UL], and representatives of other shareholders.

A top level meeting of the ministers would be necessary to seal any final deal to recapitalise Hypo, sources close to the talks said while the "technical talks" were underway on Friday.

"The finance ministry's intention for the (ministers') talks is to remind Hypo Group Alpe Adria's owners of their duties," the Austrian finance ministry said.

"They are about a significant additional amount of capital, securing the bank's liquidity in the medium term, measures to cover potential risks and the support of a sustainable future business model," the ministry said.

Hypo faces as much as 1.7 billion euros ($2.5 billion) in writedowns this year, mainly on bad loans and investments in the former Yugoslavia, and will need a similar amount of fresh capital by year-end to stay above legal capital limits.

A collapse of the bank could send ripples through the banking sector in Croatia or Serbia, where Hypo owns large banks, the head of Austria's Raiffeisen Zentralbank [RZB.UL], itself a large investor in the region, said on Friday.

Bavaria owns 67 percent of Hypo via BayernLB, which itself almost collapsed under toxic asset losses last year and survived only thanks to a state-sponsored bailout.

Talks have been complicated by strained budgets in Austria, Bavaria and the Austrian state of Carinthia -- Hypo's former owner, which still holds 12 percent -- and by the need to sell a deal to voters whose sympathy for bank bailouts is vanishing.

None of its shareholders -- the third is Austrian insurer Grawe -- has committed to provide fresh capital so far. Austria, for its part, has made further state aid for Hypo conditional on shareholder contributions.

STATE AID CONDITIONS

In a sign that Austria was losing patience with Bavaria's reluctance to fund the bank BayernLB bought two years ago, Chancellor Werner Faymann asked his German counterpart Angela Merkel on Friday to throw her weight in.

"I asked her to take on this matter," Faymann told the APA news agency at a European Union government summit in Brussels.

To make the rescue more palatable politically, stakeholders were seeking ways to recapitalise Hypo while avoiding or minimising fresh cash injections, and to share the burden more widely, sources close to the talks said on Friday.

BayernLB could swap some of the at-least 3.3 billion euros in liquidity it has provided to Hypo as interbank loans into some form of equity. It could also swap 300 million euros of Tier 2 capital into more risk-absorbing Tier 1 capital.

Both Austria and BayernLB could also guarantee risky assets that otherwise would have to be written down, thereby reducing Hypo's capital needs, the sources said.

Austria's finance ministry has also asked other Austrian Hypo banks, some of which are owned by other Austrian states, to chime in, the sources said.

Those banks would be hit if Hypo became insolvent, because the Hypo banks cross-guarantee each others' deposits and bonds they issue via a jointly owned vehicle.

But the precise shape of a deal was still uncertain.

Austria injected 900 million euros in capital into Hypo just before the end of 2008, but only after BayernLB paid in 700 million euros. It was the fourth year-end emergency capital increase for Hypo in three years. [ID:nLD421035]

BayernLB had originally said it was ready to inject another round of capital but Bavarian politicians appear to be increasingly reluctant to stand by this commitment. ($1=.6790 euros) (Additional reporting by Irene Preisinger in Munich; Editing by Simon Jessop, Ted Kerr and Carol Bishopric)