UPDATE 3-Spain begins state lottery share sale -sources

* Analyst research circulated to investors - sources

* Offer price range to be set in around two weeks - sources

* Loterias revenues growing at 3.0-3.5 pct - source (Adds government debt target)

By Kylie MacLellan and Judy MacInnes

LONDON/MADRID, Sept 19 (Reuters) - Spain has kicked off the sale of a stake in its state-owned lottery operator, three sources close to the deal said on Monday, defying tough markets to push on with what would be the country's biggest initial public offering (IPO).

The offering of 30 percent of Loterias y Apuestas del Estado, which one person familiar with the matter said could raise 6-9 billion euros ($8.3-$12.4 billion) for state coffers, was due to be completed in October, ahead of a Nov. 20 election.

Research compiled by analysts at more than 20 investment banks was sent out to investors on Monday, sources said, the beginning of a two-week pre-marketing period for the offering, during which investor feedback will be gathered.

The company, whose listing prospectus is expected to be approved at the end of the month, will set an indicative price range for its shares in late September or early October, the sources said.

The share sale comes amid a dearth of European offerings, with hopes of a September revival in new listings dented by choppy European stock markets , which have yo-yoed on euro zone debt worries.

Spain's blue-chip IBEX index has lost around 13 percent since savings bank Banca Civica completed Europe's last big listing in July.

But Loterias, seen as the jewel in the crown of Spain's privatisation programme, is considered a relatively defensive stock, having seen its profit grow despite the economic downturn. It is also offering a high monthly dividend yield.

"It is a unique animal," said one of the sources. "I can't see it necessarily opening up the IPO market."

POSITIVE

Loterias's revenue is growing at around 3 to 3.5 percent, said the person familiar with the matter, and the company plans to pay out more than 80 percent of its earnings.

Preliminary meetings this month with 22 institutional investors in London and Zurich to gauge sentiment were positive, said the person, and all were keen to be visited again when the management roadshow gets under way in October.

Interest in the offering is likely to be boosted by retail investors, who, sources have said, are expected to be offered between 50 and 60 percent of the shares.

While revenue from privatisation sales cannot be used to reduce a European country's annual public deficit under EU rules, the proceeds from Loterias will mean Spain has to issue less debt.

Spain's borrowing costs have soared, along with those of many euro zone countries, on fears the government has lost control of its finances after the annual deficit hit 11.1 percent of gross domestic product in 2009.

The Spanish Treasury has to issue around 27 billion euros in bonds in the fourth quarter to meet its gross issuance target this year, and with yields near to euro-era highs, cash from the Loterias IPO and the planned sale of Madrid and Barcelona airports will help ease that burden.

BBVA , Credit Suisse , Goldman Sachs , JP Morgan , Santander and UBS are global co-ordinators of the Loterias offering, while Citi , Deutsche Bank (DBKGn.DE) and Morgan Stanley are joint bookrunners. ($1 = 0.725 Euros) (Additional reporting by Paul Day; Editing by David Hulmes and Will Waterman)