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* Cerberus to cut stake to 7.7 pct from 58 pct
* Aozora shares plunge 10 percent
* Cerberus reducing exposure to Japan
By Emi Emoto and Taro Fuse
TOKYO, Jan 7 (Reuters) - Cerberus Capital Management LP plans to sell up to 148 billion yen ($1.7 billion) of shares in Aozora Bank Ltd in a global offering that the Japanese bank said would cut the U.S. buyout firm's stake to 7.7 percent from 58 percent.
Cerberus has been the controlling shareholder in mid-sized lender Aozora for much of the past decade, but is in the process of cutting its exposure to Japan, where there are increasingly few distressed investment opportunities for foreign funds.
In September, Aozora said Cerberus intended to reduce its stake, but did not clarify at the time how the U.S. firm planned to divest its holding. The New York-based private equity fund has paid more than 101 billion yen for the 58 percent holding it has been building since 2000.
Shares in Aozora plunged 10 percent to 250 yen by the close on Monday on news of the plan, as investors sold on fears that an influx of Aozora shares onto the market would dilute the stock and send it lower. The drop wiped 45.8 billion yen ($520.22 million) from the firm's market capitalization.
Cerberus will sell 275 million shares in Japan and another 275 million shares overseas. It may also sell up to 41.25 million additional shares depending on the demand.
An official at Cerberus' Tokyo office declined to comment.
Citigroup Inc, along with Morgan Stanley MUFG Securities Co, a joint venture between Morgan Stanley and Mitsubishi UFJ Financial Group, will serve as joint global coordinators of the sale, according to a filing.
Other banks involved in the sale are Goldman Sachs Group Inc , Barclays PLC, and Daiwa Securities Group Inc , it said.
Cerberus, named after the mythical many-headed dog that guards the gates of the underworld, was co-founded by Stephen Feinberg in 1992. Feinberg, a Princeton graduate, worked at bond trader Drexel Burnham Lambert before launching the firm.
One of the world's largest private equity firms, it led the ill-fated investment into U.S. automaker Chrysler in 2007.
The private equity fund bought Aozora, formerly known as Nippon Credit Bank, after the bank was temporarily put under government control during Japan's financial crisis in the late 1990s, when several Japanese lenders struggled under the weight of bad loans.
Cerberus bought a minority stake in Aozora in 2000, then became its biggest shareholder in 2003 when Softbank Corp sold its 48.87 percent share to Cerberus for 101 billion yen. It took the bank public in 2006.
Cerberus, known as a savvy if low-profile debt investor, has gained attention recently for its interest in buying U.S. grocery chain Supervalu Inc, and its plans to sell gunmaker Freedom Group, whose Bushmaster AR-15 rifle was used in the Connecticut school massacre last month.
The Aozora sale would mark another exit from Japanese investments for Cerberus, which plans to sell its holdings in Seibu Holdings, an operator of railways, resort hotels and real estate properties. It has hired investment banks to handle that sale, sources told Reuters.