UPDATE 1-Discover prices shares at 12 pct discount

* Discover says to receive $480 mln from offering

* Prices shares at $9.25

NEW YORK, July 7 (Reuters) - Discover Financial Services (DFS.N), the fourth-largest U.S. credit card network, said on Tuesday it will receive $480 million after the sale of common equity to strengthen its balance sheet and possibly repay U.S. government bailout funds.

The company priced 54 million shares at $9.25 each, about a 12 percent discount from Monday's close of $10.50, before it announced the public offering.

Discover said it could receive about $552 million from the offering if its underwriters choose to fully exercise their 30-day option to purchase up to an additional 8.11 million shares to cover over-allotments.

Shares of the credit card and network company fell 10.76 percent to $9.37 on Tuesday, as investors grappled with a roughly 10 percent dilution of their investment after the offering.

Discover said net proceeds from the offering will be used for general corporate purposes, which may include capital contributions to Discover Bank, possible investments, or repurchase of preferred stock issued by Discover to the U.S. Treasury under its Capital Purchase Program.

Discover, which in March took $1.2 billion from the program, has said it plans to repay the funds as quickly as possible.

Discover reported a smaller-than-expected quarterly operating loss last month, as the credit card issuer cut costs and bad loans grew less than forecast.

Thanks to its conservative expansion policy in recent years, Discover is less exposed to bad loans than most of its rivals.

The firm forecast its charge-off rate would rise to between 8.5 and 9.0 percent in the third quarter, from 7.79 in the second quarter. Still, the default rate will be well below the 10 percent-plus expected for bigger rivals such as Bank of America Corp (BAC.N) and American Express Co (AXP.N).

Chief Executive David Nelms told Reuters last month that the pace of growth of charge-offs -- loans the company does not expect to be repaid -- and delinquencies -- an indicator of future credit losses -- was decelerating, suggesting they could peak by the end of 2009 or in early 2010.

However, the company is facing headwinds from tougher industry regulation -- due in effect in February 2010 -- that would limit fees and interest rates. (Reporting by Juan Lagorio; Editing by Matt Daily, Matthew Lewis and Richard Chang)