* EU clears Commerzbank restructuring plan
* EU bans Commerzbank from making acquisitions until March 2014
* Commerzbank forced to shrink balance sheet to 600 bln eur
BRUSSELS/FRANKFURT, March 30 (Reuters) - German state-backed lender Commerzbank won European Union approval on Friday to wind down its Eurohypo mortgage unit instead of selling it in a change to restructuring plans tied to the bank's state bailout during the financial crisis.
The European Commission, which has to secure a level playing field in the 27-country EU, said the German proposal to wind down Eurohypo instead of selling it complied with EU state aid rules.
"The winding down of Eurohypo on the balance sheet of Commerzbank plus a prolongation of the acquisition ban are an adequate substitute to the divestiture of Eurohypo," EU Competition Commissioner Joaquin Almunia said in a statement
As a condition for approving this latest restructuring plan, the European Commission also banned Commerzbank from making acquisitions until the end of March 2014.
Commerzbank had initially been ordered by the European Commission to sell Eurohypo by 2014 as a pre-condition for approving an 18-billion-euro bailout in the financial crisis.
But volatile market conditions and a crisis in real estate financing left Germany's second largest bank unable to find a buyer for the loss-making mortgage bank.
Eurohypo was formed when Deutsche Bank, Commerzbank and Dresdner Bank merged their mortgage lenders 10 years ago. Commerzbank then scooped up its rivals' stakes for 4.56 billion euros in 2005.
Eurohypo subsequently aggressively underwrote new mortgage business, inflating its balance sheet to 292 billion euros by 2008 from 240 billion at the time of the merger.
Under the restructuring plan, Eurohypo's non-core activities, which include public finance and part of its commercial real estate segment, will be hived off into a separate unit named 'Non Core Assets'.
The new division will focus on winding down the business and will not be allowed to take on any new business.
Commerzbank may continue a small part of Eurohypo's commercial property business together with its own activities in Germany, France, Poland and Britain. These activities will be reduced to 25 billion euros by the end of 2013 and remain curtailed until the end of 2015.
Commerzbank said in a statement that as an additional constraint, it is not allowed to write more than 5 billion euros in new commercial property business per year until the end of 2015.
Overall, Commerzbank has to reduce its balance sheet to 600 billion euros by the end of 2012 and keep it below this level until end-2014. Commerzbank's balance sheet was 662 billion euros at the end of 2011.
In a memo to staff seen by Reuters, the company also said the revamp would lead to unspecified job cuts.
Commerzbank and scores of others across the 27-country European Union had to seek state support during the financial crisis. EU regulators have required them to sell assets, halt acquisitions and dividend payouts to ensure they do not have an unfair advantage over competitors.
Commerzbank shares were up 3 percent at 1.91 euros by 1219 GMT outperforming the STOXX 600 banking index which was up 1.1 percent.