Mitsubishi UFJ Financial Group <8306.T> is the front-runner to buy Citigroup's Japanese brokerage Nikko Cordial Securities in a deal that could be announced as early as May, a person familiar with the matter said on Friday.

Citigroup is seeking at least $4 billion to $5 billion for the unit with bids due by mid-April, said the source, who was not authorized to speak on the record.

A price of $4 billion would represent about a quarter of what the U.S. firm originally paid for Nikko Cordial.

Rival Japanese banks Mizuho Financial Group <8411.T> and Sumitomo Mitsui Financial Group <8316.T> are also bidding for the unit, the source said.

Mitsubishi UFJ has taken the lead because of a combination of factors, said a second person familiar with the situation, who was also not authorized to speak on the record.

The first one being that they've got the money, the source said. Mitsubishi UFJ had nearly $2 trillion in assets at the end of last year.

Another factor is size. Mitsubishi UFJ is Japan's largest bank and owns 21 percent of New York brokerage Morgan Stanley . Nikko Cordial would rather be sold to a company with that kind of scale than to a smaller player in the market, the source said.

A spokesman for Citigroup in Japan declined to comment, as did a spokesman for Mitsubishi UFJ.

Citigroup is selling off assets worldwide after massive losses on toxic securities and a U.S. government bailout. The bank has taken $45 billion of taxpayers' money and the U.S. government is expected to become Citi's largest investor with a 36 percent stake.

BUILDING A POWERHOUSE

Nikko Cordial, Japan's third-largest brokerage, has a network of 110 branches across Japan and strong brand recognition among retail investors.

The deal would make Mitsubishi UFJ a bigger presence in broking. The bank is already preparing to merge its Japanese brokerage with Morgan Stanley's Tokyo-based operation, taking a 60 percent stake of their joint venture to be formed by March 2010.

Taking on Nikko Cordial as well would give Mitsubishi UFJ even more firepower to chase Nomura Holdings <8604.T>, Japan's biggest brokerage.

This would make Mitsubishi UFJ a leading company in the industry, said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

Often described at Japan's most conservative bank, Mitsubishi UFJ has been on an aggressive expansion streak.

In addition to the Morgan Stanley investment, the Japanese bank last year bought out California's UnionBanCal Corp and upped its stake in Japanese consumer finance firm Acom Co. <8572.T>

It also said it would buy Citigroup's Japanese trust bank unit for $255 million, although that deal has been delayed to the end of this year. Citigroup paid about 1.6 trillion yen ($16 billion) for Nikko Cordial, making the Japanese brokerage a wholly owned unit last year.

The bank was one of several foreign players, including Britain's HSBC Holdings Plc , targeting Japan's estimated $15 trillion in household financial assets.

Citigroup has also approached Japan's top three banks about the sale of its Japanese asset management arm in a separate deal that could be worth around $1 billion, the Nikkei newspaper said on Friday.

(Editing by Michael Watson)

Japan Investment Citigroup Morgan Stanley