UPDATE 3-S.Korea sells 5 pct in Woori for $990 mln

(Adds pension fund in paragraphs 10-12, closing share price)

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 closed 3.9 percent higher at 23,900 won, beating a 0.6 percent gain in the KOSPI, amid relief that the sale was oversubscribed and not made 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 given by sources earlier.

"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.

The market has been awash with speculation that the National Pension Service (NPS) could buy a sizeable stake in Woori.

Online news provider EDaily on Thursday quoted the health and welfare minister as saying the fund would "play a leading role" in the government's sale of its remaining stake in Woori.

The NPS, which runs the world's fourth-biggest pension fund, operates under the health ministry in South Korea.

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

BANKS STRUGGLE Bank 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.