UPDATE 1-Austrian Airlines to launch capital hike

VIENNA, Aug 22 (Reuters) - Austrian Airlines said on Friday it would launch a capital hike to honour contractual obligations, issuing 57 million new shares with subscription rights to existing shareholders at a price above its current share price.

The first 1,000 shares would be offered at 4.89 euros to all existing shareholders, and any further shares would be offered at 7.10 euros, Austrian (AUAV.VI) spokeswoman Pia Stradiot said.

By 1053 GMT, Austrian shares traded up 1.78 percent at 4.57 euros after erasing earlier losses.

The shares not allocated to existing shareholders would be offered to JJW Central & Eastern Europe Beteiligungsverwaltungs GmbH -- the company of Saudi-Austrian investor Sheikh Mohamed Bin Issa al Jaber -- in an amount corresponding to 20 percent of shares in the airline operator, Austrian said in a statement.

In a deal announced in March, the Saudi-Austrian investor agreed to take the stake via a capital increase for about 150 million euros ($223 million).

He later pulled out, saying he had been misled about the airline's results and Austrian said it put the issue in the hands of its lawyers.

"We decided to execute the capital increase because we had to do it, otherwise we would have been in breach of contract," said Stradiot. "We have valid contracts with al Jaber."

The spokeswoman said Austrian had no signal from al Jaber on whether he would be interested in taking up the offer, adding the capital could be increased by up to 428 million euros.

The exact volume of the capital increase would be determined after the end of the subscription period, which runs from Aug. 25 to Sept. 8, Austrian said.

Austrian is currently searching for a strategic partner, and the country's state holding company OeIAG, which holds a 43 percent stake in the airline operator, has invited potential bidders for Austrian to notify their interest by Aug. 24.

Austrian's board has screened possible buyers and sources close to the board say a majority favours Germany's Lufthansa (LHAG.DE). The board sees Air France-KLM (AIRF.PA), Aeroflot (AFLT.MM) and Turkish Airlines (THYAO.IS) as second choices.

Austrian said with the current capital increase, there will be no trade of the subscription rights. (Reporting by Alexandra Schwarz, writing by Karin Strohecker; editing by Sue Thomas)