Germany's IKB has $24-bln subprime exposure-source

(Adds comment from source, more detail, background)

By John O'Donnell and Jonathan Gould

FRANKFURT, Aug 2 (Reuters) - Banks funding the rescue of Germany's IKB (IKBG.DE) expect it to lose up to a fifth of its roughly 17.5 billion-euro ($24 billion) exposure to the troubled U.S. sub-prime mortgage market, a source familiar with the plan told Reuters on Thursday.

German banks have clubbed together to provide 3.5 billion euros to cover IKB's potential losses from the sub-prime crisis. The source said this represented expected losses amounting to one fifth of the bank's exposure.

"The worst case possible is, naturally, that the market collapses and nothing is realisable. Or you might lose nothing. You can't be sure. But 20 percent is a realistic assessment," the source, who asked not to be named, said on Thursday.

IKB, a lender to small- and mid-sized companies, has become Europe's most high-profile casualty so far of the crisis in the U.S. sub-prime mortgage market. Its troubles have sparked investor fears that other German banks, too, might be infected.

IKB's problems last weekend prompted German financial watchdog Bafin to warn a collapse of the bank could trigger Germany's worst financial crisis in more than 75 years.

News of the scale of IKB's exposure sent its stock price into a spiral, and its share price was down a quarter on Thursday alone. The crisis has wiped about more than 40 percent off the bank's market capitalisation so far this week.

Germany's central bank chief late on Wednesday sought to calm markets, saying IKB's problems were isolated. "The exposure of German banks in the U.S. real estate market is manageable and limited overall," Bundesbank President Axel Weber said.

And there were signs that IKB's creditors were growing more confident after the rescue package put together by German state bank KfW -- which owns 38 percent of IKB -- and the country's banking association. IKB's five-year credit default swaps were unchanged on Thursday from late Wednesday.

"Everyone's calming down about the story," one debt trader said. "They're realising that KfW is going to see them through, plus the rest of the market's tightening."

CREEPING UP Default rates on mortgages to high-risk or sub-prime borrowers in the United States have been creeping up, following years of low interest rates and loosening credit standards.

This has led to problems for the banks doing the lending as well as those sharing the risk, culminating in the recent crisis.

KfW earlier this week put up over 8 billion euros to shield IKB from claims in a multi-billion euro investment fund it managed, giving IKB leeway to unwind its exposure to sub-prime lending in an orderly fashion.

The European Commission said on Wednesday it would take a close look at the KfW rescue deal to be sure it did not violate competition and state-aid rules.