Bank of America Corp has held exploratory talks with the principal investment funds of Kuwait and Qatar about selling part of its stake in China Construction Bank <0939.HK>, sources with direct knowledge of the talks told Reuters.

Bank of America, which owns about 10 percent of CCB's <601939.SS> Hong Kong-listed shares and is scurrying to raise capital for its mortgage-scarred balance sheet, will be contractually free to sell the bank shares after August 29. They are valued at about $17 billion.

The bank, the largest in the US by assets, is likely to sell half its stake in order to shore up its Tier 1 capital. Analysts believe Bank of America needs about $50 billion to meet new capital requirements.

Talks about the Chinese bank have been held with other investors in addition to the Kuwait Investment Authority and the Qatar Investment Authority, the sources said.

It is unclear if any agreement with the sovereign wealth funds or other investors have been cemented.

Bank of America, whose shares have fallen 20 percent in the past week, did not mention the China investment during a widely followed conference call that top executives held Wednesday with thousands of investors. Chief Financial Officer Bruce Thompson said on the call that asset sales are being considered to boost capital.

These stakes will be sold eventually, one source said of the Chinese bank shares. They have been shown previously to funds who matter.

Bank of America spokesman Jerry Dubrowski declined to discuss whether negotiations have been held, and officials at QIA and KIA were not immediately available for comment.

We continue to be a significant shareholder in CCB and we intend to continue the important long-term strategic alliance with CCB originally entered into in 2005, Dubrowski said.

The sources sought anonymity because they are not authorized to speak to the media.

Bank of America has not been getting much support this year from its CCB investment. Shares of the Chinese bank have fallen some 24 percent, partly in anticipation of a BofA sale, traders said.

Last November, Bank of America sold its option to purchase additional shares of CCB that were available in a rights offering.

Chinese banks have been pressured by slowing loan growth and mounting worries about bad debts. Last month, Temasek Holdings , a state-owned investment vehicle in Singapore that bought the CCB rights from BofA, sold $3.6 billion worth of stakes in two large China banks.

BofA SELLS

Over the past year, BofA has shed its stakes in banks in South America and Latin America, as well as a portion of its holdings in New York-based BlackRock Inc, the world's largest asset manager.

Last week, the Charlotte, North Carolina-based bank company sold 400,000 residential mortgage loans with an unpaid principal balance of $73 billion, to Fannie Mae, the Wall Street Journal reported Wednesday, citing sources familiar with the deal.

Middle Eastern sovereign funds are familiar with Chinese financial firms. QIA and KIA were cornerstone investors in Agricultural Bank of China Ltd's <1288.HK> IPO last year. KIA also invested $1 billion in insurer AIA Group's Hong Kong listing.

BofA paid $3 billion for a 9.9 percent stake in CCB, the world's No. 2 bank by market value, before the Chinese lender's IPO in 2005. The US bank now owns 25.6 million shares, including 23.6 million that come out of a lock-up on Aug 29. It is free to sell the remaining shares in 2013.

The U.S. bank is eager to retain about half of the stake as a bet on growth in China, one source said.

China's top three banks went public in the middle of last decade, and each attracted large investments from US and European banks before their offerings. The investments were marketed as a strong selling points by underwriters, but several of the overseas strategic investors have partly or fully exited their stakes following the expiration of lock-up periods.

(Reporting by Denny Thomas Dinesh Nair; additional reporting by Joe Rauch; editing by Jed Horowitz)

China