UPDATE 1-Thai bank preferred bidder for Siam City stake - source

BANGKOK Feb 4 (Reuters) - Thanachart Bank, 49-percent owned by Canada's Nova Scotia Bank (BNS.TO), is the preferred bidder for a 47.6 percent stake worth $950 million in Thailand's seventh-ranked lender, beating HSBC Holdings (HSBA.L), sources close to the deal said on Thursday.

Thanachart offered the best price for the stake in Siam City Bank SCIB.BK sold by the Financial Institutions Development Fund, the central bank's rescue arm set up after the 1997-98 Asian financial crisis, the source said.

Thanachart, also 51 percent-owned by Thailand's Thanachart Capital TCAP.BK, was widely seen as the frontrunner in the bid after state-owned Korea Development Bank pulled out on Monday. HSBC, Europe's biggest bank, was also in the running.

Thanachart's offer was above 31.5 baht per share, valuing the stake in 69-year-old SCIB at around $950 million, said a second source close to the deal who declined to be identified by name because he was not authorised to speak about the price.

SCIB, founded by the Thai government and the royal family, focuses on small and medium-sized businesses and operates 420 branches nationwide with 7,047 employees.

Scotiabank is keen to merge SCIB with Thanachart Bank, Thailand's leading provider of car loans, to form what would be the country's fifth-biggest bank with $23 billion in assets.

The FIDF is the central bank's rescue arm, set up after several financial firms collapsed in the 1997-98 Asian financial crisis. It is advised by UBS (UBSN.VX) and Tisco Securities TISCO.BK.

The race for the stake in the Thai lender -- the biggest up for sale by the rescue arm -- highlighted the lure of Southeast Asia as the banking industry seek new funding sources and as Thailand's economic recovery gathers momentum.

Despite a stubborn political crisis marked by violent street protests, an airport blockade and an assassination attempt in the past two years, Thailand is seeing a tentative recovery in investment, drawing $1.2 billion in foreign fund inflows in 2009.

The main Thai stock index rose 63 percent last year, making it Asia's seventh-best performer. ($1=33.13 Baht) (Writing by Khettiya Jittapong; Editing by Jason Szep)