(Adds Austrian finance ministry statement)
BERLIN, June 28 (Reuters) - Bavaria is considering legal action against Austria to fend off a demand to help shoulder the costs of cleaning up heavily indebted lender Hypo Alpe Adria , Sueddeutsche Zeitung newspaper reported, citing a state government minister.
Austria aims to wipe out 890 million euros ($1.2 billion) of subordinated Hypo Alpe Adria debt guaranteed by the bank's home province Carinthia to ensure that investors share wind-down costs for the nationalised Austrian lender.
"We are considering all options" including group legal action involving other creditors, Bavarian finance minister Markus Soeder was quoted as saying by the German daily on Saturday, likening Austria's actions to "confiscation".
Other German investors who stand to lose hundreds of millions of euros have also protested against the planned debt cancellation, writing to Austria's finance minister this week and urging him to reconsider.
The Austrian finance ministry said in an emailed statement: "The Austrian government aims to ensure that the taxpayer is not paying the full bill for the troubled bank."
It said it based its action on an existing EU directive and also a new EU bail-in directive due to come into force in 2016.
Two years after Bavarian state-owned lender BayernLB acquired Hypo Alpe Adria in 2007, Austria bought the lender for a symbolic 1 euro ($1.4) to avoid a collapse.
Hypo and Bavaria are fighting multiple lawsuits about 2.3 billion euros that BayernLB left in the Austrian bank when it was nationalised in 2009.
The Austrian finance ministry said: "Every stakeholder has of course the right to take legal actions. To avoid long-lasting legal disputes, the Austrian government is offering the former owner BayernLB further negotiations about a settlement."
Soeder said Bavaria would seek support from Germany's national government and the European Union.
$1 = 0.7331 Euros Reporting by Andreas Cremer in Berlin and Georgina Prodhan in Vienna; Editing by Pravin Char