Dutch bancassurer ING Group NV will split in two, shrinking itself into a smaller Europe-focused bank, in the most striking example yet of the deep changes the EU wants to force on banks that received state aid.

The company also said it would pay back 50 percent of its aid from the Dutch state early and launch a 7.5 billion euro ($11.25 billion) rights issue.

Monday's surprise announcement from ING, which said the dismantling was expected to run through 2013, accelerates a move that investors had expected, but not for years to come. It effectively dismantles something of a national champion that was created just 18 years ago.

I think the separation of the assets is a good move that brings more simplicity to ING as a financial institution, said Paul Beijsens, an analyst at Theodoor Gilissen.

ING shares fell almost 9 percent to 10.63 euros at 0950 GMT (4:50 a.m. EDT), as analysts expressed doubts about ING's tapping the market with a rights issue of nearly 30 percent of its market capitalization. SNS Reaal, one of the last major bancassurers along with ING, was also down almost 9 percent.

This is still a difficult environment and ING may be running ahead of themselves with the rights issue but capital markets have shown they can be quite forgiving to ING, said Fred Huibers, a fund manager at Het Haags Effektenkantoor.

The splitting process will leave its balance sheet 30 percent smaller than before its bailout. ING said it would be predominantly focused on Europe with selective growth options elsewhere.

The European Union's executive arm wants to force banks which took state aid to restructure and is trying to push through most of those rulings soon, before the current commission's term expires.

A rescue plan for Germany's second-largest bank, Commerzbank , got the go-ahead from European antitrust regulators in May on the understanding that it divest about 45 percent of its balance sheet.

Royal Bank of Scotland and Lloyds Bank Group, 70 percent and 43 percent respectively owned by Britain, are expected to be ordered into disposals by the European Commission.

Belgium's KBC and Franco-Belgian Dexia are also awaiting rulings from the executive arm of the 27-member European Union.

ASSETS TO BE SOLD

ING said the divestment of the insurance operations would be completed by 2013, through IPOs and or sales.

On a conference call with reporters, ING Chief Executive Jan Hommen said it would be quite interesting to launch one IPO for the entire global insurance business as a whole, adding that he hoped for the insurance divestment process to start one way or another next year.

ING will also split off some Dutch mortgage operations into a new company that would have about a 6 percent market share.

Pursuant to the restructuring agreement with the EU, ING also said it will have to sell ING Direct USA, its American online banking business. That sale is expected to take until the end of 2013 to complete.

The company has already made a number of divestitures this year, including wealth management businesses in Switzerland, Australia and New Zealand and the broader Asian region.

Those came under a program it announced in April, where it targeted 6 billion to 8 billion euros in asset sales.

REPAID AID

Subsequent to a revised agreement with the Dutch state, ING said it would repurchase 5 billion euros in core Tier 1 securities in December. ING received 10 billion euros from the state in October 2008 to bolster its balance sheet amid a crisis in the Dutch banking sector.

ING also said it would pay an additional 1.3 billion euros under an asset guarantee scheme from January. At that time ING and the state made a deal for the government to guarantee the risk on 22 billion euros of mortgage-backed securities at 90 percent of their par value.

The EU had extended a review on that deal, saying it appeared the state paid too much for the assets.

In a separate statement, ING said it expected to report an underlying net profit of 750 million euros for the third quarter, adding that a moderate stabilization of operating conditions that started in the second quarter continued into the third quarter.

For a graphic showing ING performance and key events, click here: http://graphics.thomsonreuters.com/109/NL_INGS1009.gif

(Additional reporting by Greg Roumeliotis and Gilbert Kreijger in Amsterdam and Philip Blenkinsop in Brussels; Editing by Jon Loades-Carter)

($1=.6664 Euro)

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