CORRECTED-UPDATE 2-S.Korea sells 5 pct in Woori for $990 mln

(Corrects sector PE to 8.7 times in paragraph 12)

By Rafael Nam

SEOUL, June 21 (Reuters) - South Korea sold a 5 percent stake in Woori Financial Group (053000.KS), the country's third-biggest financial services provider, raising $990.3 million in a block sale on Thursday, part of the government's drive to sell off stakes in several companies.

With the main KOSPI share index at record highs, the government is selling stakes in firms such as Korea Electric Power Corp. (KEPCO) (015760.KS) to recoup some of the $181.5 billion it spent rescuing companies after the 1997-98 Asia financial crisis.

Shares in Woori rose 4.4 percent to 24,000 won by 0415 GMT, beating a 0.9 percent gain in the KOSPI, amid relief that the government did not sell the stake at a deep discount.

Analysts noted the increase in the number of tradeable shares made it more likely Woori will be included in a major index such as those compiled by MSCI-Barra.

State-run Korea Deposit Insurance Corp. said it sold 40.3 million Woori shares overnight at 22,750 won each, a 1.1 percent discount to Wednesday's closing price. The price was at the top of a 22,200-22,750 won range that sources had earlier provided.

"The lower the KDIC stake, and the higher the free float, the more likely the stock will gain entry into the MSCI and other indices," Goldman Sachs said in a client note.

Domestic investors bought 52 percent of the shares on offer, with the rest placed overseas, the KDIC said. The deal reduces KDIC's stake in Woori Financial to 73 percent, and raises the free float to 27 percent.

The sale was marked by strong demand, with one source noting the foreign portion of the subscription was eight times covered. The government will continue to pare down its Woori stake until it holds around 50 percent, a majority stake it hopes to then sell to strategic investors.

Credit Suisse (CSGN.VX), Lehman Brothers LEH.N, Korea Investment and Securities and Samsung Securities (016360.KS) are managing the deal.

BANKS STRUGGLE

Banking shares have underperformed the KOSPI recently on worries of tamer core lending earnings, but the sector .KS51 rallied on Wednesday to a 10-year high as banks seek to expand into the brokerage sector to find new growth venues.

Woori Financial shares hit a record 26,500 won on Feb. 15, but have stagnated since and were up 4.1 percent for the year as of Wednesday's close. The stock trades at 8.4 times forecast 2007 earnings, versus a sector average of 8.7 times, according to Goldman Sachs.

The KDIC sold a 5.7 percent stake in Woori for $282 million in a block sale in 2004. Earlier this year, the state-run agency realised around $1.2 billion from the sale of shares in Shinhan Financial Group (055550.KS), South Korea's No. 2 banking group.