UPDATE 3-Investors bet on settlement in UBS tax dispute

* U.S. judge wants to know if U.S. prepared to shut UBS

* Analysts see increased chance of deal before hearing

* Do not expect U.S. to close UBS down in United States

* Shares close up 2.9 percent in Europe (Adds comments from US lawmaker, industry expert)

By Lisa Jucca

ZURICH, July 9 (Reuters) - Investors bet on Thursday the United States would not go as far as shutting down UBS AG (UBSN.VX) there in a tax dispute, instead expecting the Swiss bank to be hit by a hefty fine as part of a swift out-of-court settlement.

UBS's shares were higher after a U.S. judge late on Wednesday ordered the U.S. government to say if it was prepared to seize the bank's assets in the United States, and were roughly in line with the European bank sector.

U.S. District Judge Alan Gold, set to preside over a court hearing next week in a suit seeking to force UBS to disclose 52,000 secret account holders, gave the Justice Department until noon EDT (1600 GMT) on Sunday to reply.

"This is shaping up to be a battle royal," said Raymond Baker, director of Global Financial Integrity, a think tank that that follows illegal financial flows. "My hope is that the U.S. hangs tough."

Analysts and traders see an increased likelihood of a deal ahead of the hearing due to start Monday, as they do not expect Washington to take the radical step of closing down UBS in the United States, thus risking potentially damaging consequences for the global financial system.

How much UBS may have to pay to end the tax dispute is unclear.

But analysts point out the Swiss bank, one of the world's largest wealth managers, could afford up to about $5.5 billion without needing an immediate cash injection due to a recent capital increase and asset sales

"People do not expect the United States to shut down UBS. That is why the shares should end up slightly up today," said a bank analyst who declined to be named. "There is a lot of pressure for a settlement to take place on Sunday."

UBS employs about 27,000 people in the United States, or nearly one-third of its global workforce.

Shares in UBS ended 2.9 percent higher at 12.94 Swiss francs against a 2.4 percent rise in the DJ Stoxx European banking index .SX7P.

G8 FIGHT ON TAX EVASION