WRAPUP 1-IKB merger ardour fades as German bank woe pervades

By Jonathan Gould

FRANKFURT, May 15 (Reuters) - The German government's planned sale of stricken lender IKB (IKBG.DE: Quote, Profile, Research, Stock Buzz) appeared to be faltering on Thursday amid renewed warnings from the country's financial watchdog that the subprime "tsunami" had not yet blown over.

Bavarian state bank BayernLB had [BAYLB.UL] dropped out of the running to buy loss-making IKB and will not submit a firm offer by Friday, sources close to the bank told Reuters.

Another potential bidder, financial investor JC Flowers, was reported on Wednesday by Reuters to have backed out.

The Financial Times Deutschland newspaper reported on Thursday that private bank Sal. Oppenheim, which owns around 5 percent of IKB, was highly unlikely to submit an offer for the bank, one of Germany's highest-profile casualties of the subprime meltdown.

"The sales process is a dead as a dormouse," the paper quoted an investment banker as saying.

German state development bank KfW [KFW.UL], which holds the government's 45 percent stake in the loss-making lender, said on Thursday it had received a number of good offers for IKB and was preparing a shortlist for a final round of bidding.

But the departure of BayernLB and JC Flowers makes it unlikely the government will be able to reach its target price of around 800 million euros ($1.2 billion). It is seeking a quick disposal of the bank, which has tarnished the reputation of Germany as a banking centre and caused a political outcry over using taxpayer money to pay for private-sector management mistakes.

KfW has been forced to repeatedly bail out IKB as holes in its finances from its investments in risky U.S. assets grew.