UPDATE 1-Luxembourg says has legal right to host relocating EU banking body

(adds quote from Commission spokeswoman)

BRUSSELS, March 30 (Reuters) - Luxembourg has formally joined the fray over the future seat of the European Union banking agency which will have to relocate from London after the Brexit vote, claiming that it has a legal right to host the body.

The European Banking Authority (EBA) and its 159 London employees are expected to move quickly from the Canary Wharf financial district after Britain voted to quit the bloc, but the new seat for the agency that coordinates EU banking rules is still uncertain.

The European Commission has suggested last week that one option could be to move the body to Frankfurt and merge it with the EU agency that oversees insurers and pension funds, the European Insurance and Occupational Pensions Authority (EIOPA), which is already based in the German financial capital .

The suggestion has stirred criticism in Paris, which is also keen to host the agency, and in other EU cities which long for the jobs and prestige associated with hosting the EBA.

Luxembourg, which has long been seen as a potential host, has now raised its stakes by claiming that it has a legal right to be the EBA’s seat.

The Grand Duchy’s Prime Minister Xavier Bettel sent a letter on Wednesday night to EU leaders to formally advance Luxembourg’s candidacy.

“With this (letter), we have requests from 27 member states to host the EBA,” a spokeswoman for the EU Commission said, adding that similar requests were made by all EU states also for the European Medicines Agency, the other EU body based in London and forced to relocate because of Brexit.

Luxembourg is a prominent financial centre, relatively close to the EU’s Brussels headquarters, and already hosts other EU banking institutions, including the euro zone’s bailout fund and the European Investment Bank, Bettel said in the letter, of which some excerpts were circulated to the media.

A spokeswoman for the Grand Duchy added that the letter is more than a simple candidacy, as the country “has a legal claim to host the EBA.”

This claim is rooted in a decision taken by European leaders in 1965 in which they said they were “willing” to locate in Luxembourg EU bodies “concerned with finance”.

The spokeswoman said that the decisions to establish the European Central Bank in Frankfurt and the EBA in London were taken in agreement with Luxembourg and as an exception to its role, formalised in 1965, as one of the EU’s seats.

“This time, we want the 1965 decision to be respected and therefore claim that the EBA’s new host should be Luxembourg,” the spokeswoman said.

The European Parliament has urged to decide quickly on the EBA’s new seat and the Commission said it will make a proposal during the two-year Brexit talks, officially launched on Wednesday. The final decision will be made by EU states.

Reporting by Francesco Guarascio Editing by Jeremy Gaunt