U.S. private equity fund Lone Star confirmed on Tuesday it was in exclusive negotiations with HSBC to sell its 51 percent stake in Korea Exchange Bank, with a market value of $4.8 billion.

The confirmation comes a day after HSBC said it was in talks to buy a majority stake in KEB, a move that would boost its profile in Asia's third-biggest banking market, but which could flush out domestic counterbidders, including top South Korean bank Kookmin.

The discussions are timely ... it is now time for Lone Star to sell its share to a strategic investor which can bring the bank to a new level of competitiveness, Lone Star Chairman John Grayken said in an e-mailed statement.

An industry source expects Lone Star to sign a preliminary agreement with the London-based bank soon, allowing both sides to continue exclusive talks for 90 days prior to a final deal.

Shares in KEB were up 2.5 percent at 14,300 won by 1:45 a.m. EDT, beating a 0.3 percent rise on the broader market.

The U.S. private equity house's legal battle in South Korea over its $1.2 billion purchase of KEB in 2003 has delayed the bank's sale. Lone Star last year cancelled a $7.3 billion offer from Kookmin to buy 71 percent of KEB.

It also ended talks this year with Singapore's DBS Group Holdings, with Southeast Asia's largest bank hinting it walked away from KEB because of ongoing legal issues.

But Lone Star and financial regulatory officials have said there are no legal obstacles keeping the fund from cashing out of KEB, only political ones.

Recent state-run asset sales have gone to local companies after a public backlash against foreign firms that have racked up heavy capital gains by buying distressed domestic companies.

The industry source said HSBC may be trying to test regulators' reaction by leaking news of its talks with Lone Star, before it enters into a contract.

Separately, the regulatory Financial Supervisory Service said it would next month launch an audit of HSBC's operations in South Korea in a routine check-up, dening any relation between that and the bank's interest in KEB.

South Korea Investment HSBC