CORRECTED-UPDATE 3-Greece's Piraeus Bank turns to emergency funding

(Corrects paragraph 3 to show Piraeus was second not first Greek bank to say it tapped ELA)

* Piraeus reports H1 net loss of 820 mln euros on bond swap

* H1 net interest income up 6 pct to 628 mln euros

* Bank says deposits down 12 pct year-to-date

* Bank tapped cenbank's emergency liquidity window in Q3

(Releads with Piraeus using ELA emergency funding)

By George Georgiopoulos

ATHENS, Aug 31 (Reuters) - Greece's fourth-largest bank Piraeus has been forced to make use of emergency funding from its own central bank after running out of eligible collateral that allowed it to access cheaper European Central Bank funds.

Greek banks have become dependent on the ECB for liquidity after being shut out of wholesale funding markets due to concerns about the country's sovereign debt.

Some are now strapped for eligible collateral after a series of sovereign credit downgrades, with Piraeus (BOPr.AT) the second bank to admit the need for emergency funding.

"We have accessed the ELA mechanism in the third quarter," a Piraeus official said on Wednesday in a conference call after the bank reported a first-half loss of 820 million euros.

"It gives us more room to move, more flexibility. It's more expensive than ECB borrowing. The cost is about 3.5 percent versus 1.5 percent at the ECB."

Emergency liquidity assistance (ELA) is effectively loans by the national central bank to illiquid but solvent banks.

Hit by steady deposit outflows, Greek lenders have already borrowed more than 100 billion euros from the ECB, using Greek bonds as collateral.

Piraeus said the net loss in the first half of the year was due to its participation in a voluntary debt exchange (PSI) programme aimed at relieving Greece's debt burden. This resulted in a 1 billion euro pretax writedown.

The bank's shares were 14.5 percent lower at 0.65 euros at 1518 GMT.

Sovereign debt downgrades, deposit outflows and rising loan losses in a deepening recession have forced Greek banks to explore tie-ups to bolster their financial strength in a bid to regain access to wholesale funding markets.

On Monday, Greece's second- and third-largest lenders Eurobank (EFGr.AT) and Alpha Bank (ACBr.AT) agreed to merge to form the largest bank in southeast Europe, sparking expectations of further deals in Greek banking.

MULLING DEALS

Piraeus itself considered a combination with state-controlled ATEbank (AGBr.AT) and Post Savings (GPSr.AT) last year and has also rebuffed a bid by Marfin Popular (MRBr.AT) in the past.

Talk now is that it may team up with National Bank (NBGr.AT) or Marfin. NBG tried to take over peer Alpha Bank earlier this year but was rejected.

On Tuesday, NBG chief executive Apostolos Tamvakakis said the group would not rush into big strategic moves until there was more clarity on the outcome of the debt exchange plan and a test of Greek banks' loan books by BlackRock Solutions, commissioned by the central bank. [ID:nLDE77T0LZ

Greece's top central banker said more consolidation was in store after the tie-up of Alpha and EFG.

"This sets the stage for more changes that will form a very positive picture in the banking system," said Bank of Greece chief George Provopoulos.

Piraeus Bank's participation in the so-called private sector involvement (PSI) will see almost all of its Greek government bonds exchanged for new, principal-guaranteed paper.

"About 99 percent of our Greek government bonds are in scope for the PSI as they mature by 2020 and will be replaced by safer bonds. We differ on this from most other banks. We will start with a clean slate," Piraeus Managing Director Alex Manos told Reuters.

Piraeus had a Core Tier 1 capital adequacy ratio of 8.2 percent at the end of June. Manos said that after the debt exchange and other mitigating measures, including plans to sell its Egyptian operation, the ratio would rise to 10 percent.

Egypt's central bank has allowed due diligence and Standard Chartered considering buying Piraeus's Egyptian subsidiary. (Editing by Dan Lalor and Alexander Smith)