UPDATE 2-Commerzbank's toxic debt mountain tops $68 bln

* Bank says earnings will be hit

* Toxic paper reaches 55.4 billion euros

* Commerzbank’s portfolios are suffering

* Shares up 11 percent on hopes of solution

(Adds background, shares)

FRANKFURT, March 27 (Reuters) - Commerzbank CBKG.DE has identified more than 50 billion euros ($68 billion) of toxic debt that it plans to manage separately, raising investors' hopes it may soon find a solution for its problem loans and investments.

Commerzbank’s announcement on Friday that it had isolated the portfolio gave momentum to speculation it could set up a bad bank with government backing to handle the toxic assets, sending its stock sharply higher.

Commerzbank's share rose 11 percent to 4.43 euros by 1159 GMT, outpacing a slightly negative European bank shares index .SX7P.

Commerzbank, whose ill-timed takeover of Dresdner Bank on the eve of the collapse of U.S. investment bank Lehman Brothers has compounded its troubles, said Dresdner had 39.9 billion euros of toxic securities on top of Commerzbank’s own 15.5 billion.

“In 2009, nearly all portfolios are suffering from the stress caused by market conditions, which is why the bank’s results will be strongly affected by charges against earnings,” it said in its 2008 annual report.

The lender’s shares, which have tanked in the wake of a government-backed rescue, jumped in recent days as investors applauded moves in the United States and Europe to move toxic assets off banks’ balance sheets.

Merck Finck analyst Konrad Becker said bank stocks around the world had risen since U.S. Treasury Secretary Timothy Geithner outlined plans to buy up troubled bank assets earlier this week.

Becker said moves to deal with toxic assets had stoked speculation that a solution could be found for Commerzbank’s second problem -- commercial property lender Eurohypo.

Much of the bank’s problem loans come from this business and many hope that they can be rehoused off Commerzbank’s balance sheet.

“Commerzbank without Eurohypo looks better to investors,” Becker said.

The bank, whose main business is lending to medium-sized companies in Germany, said it expected a large rise in insolvencies this year, boosting bad debts.