UPDATE 1-China Merchants plans $3 bln rights offer-sources

* Investment banks formally pitching for deal

* $3 bln offer would be split between H and A shares

* Offer would be one of the largest in HK this year

(Adds details, background throughout)

By Michael Flaherty and Clare Jim TOKYO/HONG KONG, July 8 (Reuters) - China Merchants Bank (3968.HK) plans to raise about $3 billion through a rights share offering by the end of the year, aiming to boost its capital after overpaying for a recent acquisition, investment banking sources said.

The issue would be one of the largest in Hong Kong this year, and comes as corporate capital raising in Hong Kong's and China's stock markets picks up steam after sharp gains by the markets in the second quarter.

Several investment banks had begun formally pitching China Merchants Bank (600036.SS) for mandates to handle the offering, the sources said on Wednesday, speaking on condition of anonymity.

The offering would be split between holders of China Merchants' Shanghai-listed A shares and its Hong Kong-listed H shares, they said, adding the bank was pursuing a rights offering over other kinds of offers due to its dual-listing.

Rights offerings are stock issues to existing shareholders, priced at a discount. Such offerings usually take a few months to structure, and are relatively easy to manage because they only involve existing shareholders.

While shareholders can rebel against such offerings, most rights issues in Asia in the last year have succeeded with little problems.

Sources cautioned that no banks had yet been mandated, and the $3 billion target for the offering could change. That figure compares with a total market capitalisation of about $48.5 billion for the company's A and H shares combined, according to Reuters calculations.

The sources said they expected China Merchants Bank to soon indicate which banks it would like to handle the offering, which would come with standard equity fees.

An investor relations officer at China Merchants Bank, China's sixth-largest lender, said only that the bank was studying the issue, but had no concrete plans.

Earlier this year, China Merchants said it would book a provision against its $4.7 billion acquisition of Hong Kong's Wing Lung Bank in 2008. [nPEK350559]

A rights offering by China Merchants would be the largest since HSBC (0005.HK) (HSBA.L) in April raised $19 billion in a rights issue to help it overcome losses in the United States. [nL5132835]