UPDATE 2-Ambac Assurance CDS worth 20 pct in auction

(Updates with final price)

NEW YORK, June 4 (Reuters) - Sellers of protection on assets guaranteed by Ambac Assurance Corp will need to pay out 80 percent of the amount of insurance they sold, after an auction was held on Friday to set a value on its credit default swaps.

CDS on Ambac's guaranteed portfolio are worth 20 cents on the dollar, said auction administrators Creditex and Markit. That means protection sellers will need to pay buyers $8 million per $10 million of insurance they sold.

Wisconsin state regulators triggered payments on the CDS when they seized Ambac Financial Group's ABK.N bond insurance arm's toxic assets in March. Net volumes of around $2.3 billion are outstanding on the contracts, according to the Depository Trust & Clearing Corp.

Credit default swaps are used to protect against a debt default or to speculate on a borrower's credit quality. When a default occurs, the protection sellers pay the buyers the sum insured, minus the recovery amount.

In a CDS auction, protection buyers typically put forward the cheapest debt available to settle the contracts. Friday's auction included 156 debt issues selected by market participants.

Assets included in the auction included residential mortgage and home equity loan-backed securities issued by failed firms Bear Stearns and Countrywide Financial and defaulted bonds issued by the bankrupt Las Vegas monorail.

Ambac will not be required to pay out on credit derivatives that it sold, but banks that tried to reduce their exposure to the company by buying credit protection on it will be able to collect on their contracts.

Wisconsin regulators received court approval to temporarily prevent the company from paying out claims on assets it guaranteed. Instead, investors in about $35 billion of home loan bonds guaranteed by the company might get about 25 cents on the dollar in cash, and additional future payouts. For details, see [ID:nN25237354]

Ambac's capital levels have become severely strained by the mortgage crisis, which forced it to make big payouts on a number of complicated repackaged mortgage bonds it had guaranteed, among other instruments. (Reporting by Karen Brettell; Editing by Andrea Ricci)