UPDATE 4-Aegon calms share issue fears after EU deal

* Aegon pays back 0.5 bln euros to state this month

* To pay back remaining 1.5 bln euros by end-June 2011

* CEO says "unlikely scenario" to issue shares to state

* Aegon keeps options open for bond, private share issue

* Shares up nearly 6 pct, outperforming insurance index

(Adds CEO comment, EU confirmation, updates shares)

By Gilbert Kreijger

AMSTERDAM, Aug 17 (Reuters) - Dutch insurer Aegon (AEGN.AS) allayed investor fears of a large share issue to repay state aid after saying on Tuesday it had negotiated a deal for approval of the support with the European Commission.

Aegon, a top-10 life insurer in the United States, where it owns Transamerica, received 3 billion euros ($4.03 billion) from the Dutch state in 2008 at the height of the credit crisis, and some analysts had expected a share issue of 1 billion euros or more for the two-thirds it still needs to pay back.

Aegon shares rose 5.9 percent after the group said in a statement it had negotiated a lower penalty on the repayment and said it would pay back 500 million euros before the end of August.

Aegon kept open the option to convert state aid securities into common shares to pay down the remaining 1.5 billion euros.

"Let me make clear that this is an unlikely scenario as this would lead to issuing 375 million new common shares to the Dutch state, resulting in the Dutch state becoming a 20 percent shareholder," Chief Executive Alex Wynaendts said on a conference call.

The insurer, which is looking at options to sell Transamerica's reinsurance business, was "committed" to repaying the 1.5 billion euros by June 2011, Wynaendts said.

Aegon said the penalty on repaying 500 million euros of state aid was reduced to 10.3 percent, plus 11 million euros of accrued interest, from 50 percent previously.

"Fear of a large share issue should also fade away in our view although the repayment of the remaining 1.5 billion euros plus 50 percent premium may still require a small share issue," KBC Securities analyst Dirk Peeters said in a note.

Wynaendts told Reuters he kept all options open when asked if Aegon could issue a bond or issue shares to the market to finance the 1.5 billion euro repayment.

Aegon's stock was up 5.9 percent at 4.58 euros by 1017 GMT, outperforming the STOXX Europe 600 insurance index .SXIP, which rose 1.2 percent.

The European Commission, which has set some competition and takeover restrictions for Aegon until it fully repays the state, confirmed the state aid approval in a separate statement. ($1=.7804 Euro) (Additional reporting by Marcel Michelson; Editing by David Cowell and Louise Heavens)