VIENNA, June 29 (Reuters) - Austria's Raiffeisen Zentralbank on Monday said it withdrew an offer to exchange a 500 million euro ($700 million) hybrid bond into a higher yielding one.

A source close to the deal said that only around a fifth of the old bond's owners had accepted the offer. 'This would have meant that the new bond would have been too small to have sufficient liquidity,' the source said.

RZB had launched an offer on June 18 to swap the outstanding bond into a new one at 55 percent of face value, a deal which could have bolstered the unlisted bank's core Tier 1 ratio through a book gain of up to 225 million euros.

But the bank, owner and main funding source of emerging Europe's No.2 lender Raiffeisen International, late on Monday in a statement withdrew the offer. It did not say why.

Banks including Allied Irish Banks, Royal Bank of Scotland, UBS [ID:nLQ956241 and Standard Chartered have succesfully made similar bond buybacks or exchanges this year to improve their Tier 1 capital ratio.

To compensate investors, RZB's new bond would have had a 15 percent coupon -- which analysts have said was high compared to other deals due to RZB's emerging European exposure -- after the old one had carried a 5.169 percent coupon.

RZB has said it expected up to 50 percent of bondholders to accept the offer, based on experiences in similar deals done by other European banks.

RZB had a Tier 1 ratio of 6.8 percent by the end of March, or 8.4 percent if a state capital injection done in early April was included pro-forma. The bank does not publish its core Tier 1 ratio in its financial reports.

(Reporting by Boris Groendahl; editing by Carol Bishopric) ($1=.7143 Euro) Keywords: RZB/BOND .... Keywords: RZB/BOND

(boris.groendahl@reuters.com; +43 1 53112-258; Reuters Messaging: boris.groendahl.reuters.com@reuters.net)

COPYRIGHT

Copyright Thomson Reuters 2009. All rights reserved.

The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.