UPDATE 1-Commerzbank to start share sale mid-week -sources
* New Commerzbank shares to be offered mid-week - sources
* Bank will offer stock at a discount of around 50 pct
* Roughly 12 percent of Commerzbank shares shorted - Markit
* Commerzbank shares down 5 pct (Rewrites first paragraph, adds background, share price, data on share shortage)
By Arno Schuetze and Alexander Hübner
FRANKFURT, May 13 (Reuters) - Commerzbank AG will start its 2.5 billion euro ($3.2 billion) share sale this week, offering a hefty discount in a move designed to help repay state aid, two people familiar with the transaction told Reuters.
Commerzbank is joining a slew of European banks tapping shareholders for fresh money, including Germany's bellwether Deutsche Bank, Russia's second-largest bank VTB as well as Greek and Spanish banks.
The banks are taking advantage of bullish equity markets as European shares trade at five-year highs, while bank shares have risen to around the two-year high they reached in late January.
While Deutsche Bank raised 3 billion euros overnight last month, placing new shares at the previous day's close, some Commerzbank shareholders have said they are looking for a considerable discount before buying the new shares, given the fact that Commerzbank recently gave a muted 2013 outlook.
The subscription period for the new shares will start in the middle of this week, the sources said on Monday.
Commerzbank will offer new stock at a discount of around 50 percent to the current share price, implying the new shares are likely to be sold at around 5.50 euros each, the sources added.
Commerzbank, which last month secured shareholder approval for the transaction, declined to comment. The lender has not yet said what volume of new shares is plans to sell, only that it plans to issue enough to raise its target of 2.5 billion euros.
Shares in Germany's second biggest lender lost 5 percent by 1212 GMT.
Hedge funds have invested heavily in Commerzbank over recent months and roughly 12 percent of the shares have been used for bets on a falling price, known as shorting, according to index and data provider Markit.
Of the shares suitable for shorting, more than 70 percent have been utilised for such bets, Markit said.
Borrowing Commerzbank shares for shorting currently costs between 2 and 4 percent on an annual basis, up from a month ago when it cost less than 50 basis points, Markit said, adding a main driver for the activity was a desire to arbitrage the rights issue.
Deutsche Bank, Citi and HSBC are organising the issue.
As part of the transaction, German bank bailout fund Soffin will this week sell Commerzbank shares worth 625 million euros, reducing its stake to roughly 18 percent from 25 percent.
According to sources familiar with the transaction, Soffin will place the shares at close to the TERP of slightly above 8 euros.
Commerzbank intends to use the proceeds from the share issue to repay some of the state aid it received in the financial crisis and to strengthen its capital buffers to comply with stricter bank rules.
In a 2008 bail-out, the German government took a 25 percent stake in Commerzbank and also granted it billions in a debt-equity hybrid dubbed a silent participation.
By repaying the silent participation held by the state and insurer Allianz, Commerzbank will save annual interest payments of roughly 200 million euros. ($1 = 0.7709 euros) (Editing by David Holmes)