* Deal worth $500 mln to $600 mln, media reports say
* Source says four banks being considered to buy LCB
* U.S. Treasury decision alarmed Lebanon's banks
By Mariam Karouny
BEIRUT, March 3 A privately owned Lebanese bank is expected to be sold to another local bank after the U.S. accused it of involvement in money laundering and drug trafficking, sources familiar with the deal said on Thursday.
The sources said Beirut-based Lebanese Canadian Bank (LCB) had been put up for sale after the U.S. Treasury Department refused to back down on a decision to ban the bank from dealing in dollars.
"The decision has been taken. The bank will be sold. We still do not know who is going to buy the bank, but definitely it is not going to be one of the three big (Lebanese) banks," one of the sources told Reuters.
Media reports have said the bank is likely to be sold for between $500 million and $600 million.
Another source said four banks were being considered to buy LCB -- Byblos Bank (BYB.BY), Societe Generale de Banque au Liban, Credit Libanais and Lebanese French Bank.
A banking analyst said selling the bank aimed to shield the banking sector's reputation.
Although Lebanon does not encourage mergers between its top 11 banks, a banking source said the Central Bank was looking for a bank big enough to raise funds for the purchase.
The U.S. Treasury Department last month designated LCB a "primary money-laundering concern", saying it was involved in a money-laundering and drug-trafficking operation with ties to Shi'ite militant group Hezbollah. [ID:nN10290735]
The bank denied the charges, and Lebanon's Central Bank governor Riad Salameh said LCB was well managed and complied with international laws on money laundering.
LCB is ranked as the eighth-largest Lebanese bank, with more than $5 billion in assets, 35 branches in Lebanon and an office in Montreal.
The U.S. Treasury announcement sent shock waves through Lebanon's banking sector, which helps the state meet borrowing needs to finance a public debt equivalent to 129 percent of gross domestic product.
Analysts said bankers were worried that Washington might begin to target the banking sector and impose sanctions on it to exert more pressure on the Lebanese government to confront Hezbollah, which it describes as terrorist group.
Hezbollah and its allies brought down the government of Saad al-Hariri in January after he refused to repudiate a U.N.-backed tribunal that is expected to indict members of the group over the killing of Lebanon's former prime minister Rafik al-Hariri.
Last week, the central bank said Salameh held a "constructive" meeting with senior U.S. treasury officials in which the concerns of both parties were addressed.
"Possible options and processes were considered to resolve the current situation with the Lebanese Canadian Bank, and both parties affirmed their continued commitment to mutually beneficial cooperation," a central bank statement said.
It also said Salameh was assured that the findings on the Lebanese Canadian Bank "does not reflect a decision to target the Lebanese banking sector".
The bank reported a 63 percent increase in net profit last year to $52 million. (Editing by Will Waterman)