UPDATE 1-Oman borrows $1 billion to fill gap left by falling oil prices

* Borrows as oil price slump stretches state finances

* Pricing increased by 10 bps after rating cut by S&P

* Eleven banks participated in five-yr loan (Adds details, context)

DUBAI, Jan 14 (Reuters) - The government of Oman has borrowed $1 billion as the Gulf country tries to cope with strains on its finances as oil prices plummet.

The sultanate, a small oil exporter, raised funds through a syndicated loan at 120 basis points over the London interbank offered rate (Libor), Nasser al-Jashmi, under-secretary at the ministry of finance, told Reuters on Thursday. Eleven banks took part in the five-year loan.

The country has become the latest Gulf government to seek funds from either the international bond or loan market to plug budget deficits opened up by the decline in oil, which has lost three-quarters of its value since June 2014.

Qatar closed a $5.5 billion five-year loan earlier this month and Sharjah, one of the United Arab Emirates, has started meeting investors for a potential sukuk this week. Qatar, Saudi Arabia and Kuwait are also expected to make a rare foray into the international debt market this year .

Oman began seeking a five-year loan in November, offering 110 basis points over Libor. It had to raise that after rating agency Standard & Poor’s downgraded the country’s debt and retained a negative outlook .

“The untimely downgrade of Oman by Standard and Poor’s to the brink of investment grade, just after the offering was launched, hurt sentiments towards the deal further,” one of the bankers said.

Crowded loan markets towards the end of 2015, with Qatar and several bank and corporate issuers all seeking funds at the same time, added to the pricing pressure.

However, Oman priced the loan before oil slumped another 20 percent in the first two weeks of 2016, towards $30 per barrel, and geopolitical tension erupted between Saudi Arabia and Iran. Both could have pushed the borrowing rate higher.

The 11 banks participating in the loan include Citigroup, Gulf International Bank and Natixis, who were the initial bookrunners for the transaction.

The other banks are National Bank of Abu Dhabi, Societe Generale, Sumitomo Mitsui Financial Group, Bank of Tokyo-Mitsubishi UFJ, JP Morgan, Credit Agricole, Standard Chartered and Europe Arab Bank.

Oil’s plunge since 2014 has hit Oman’s finances hard. It swung to a deficit of 3.26 billion rials in the first 10 months of the year from a surplus of 189.6 million rials a year earlier . To bridge the deficit, Oman has begun spending cuts, tax rises and fuel subsidy reforms.

The country has an extended domestic borrowing programme, including regular treasury bill auctions. The borrowing is adding pressure to the liquidity in the local banking system and forcing the government to raise money abroad.

The government has also talked about selling an international bond, which bankers expect to happen in 2016. (Writing by Archana Narayanan, editing by Matt Smith, Larry King)