Part-nationalized British lender Royal Bank of Scotland said the state's holding in the group will rise to 70.3 percent from 58 percent after its private sector investors largely shunned a sale of new shares.

RBS said on Tuesday that private sector shareholders bought just 0.7 percent of the shares offered for sale, leaving the government to acquire the remainder.

Private shareholders had been expected to stay on the sidelines, as RBS shares have consistently traded below the offer price of 31.75 pence in recent weeks.

The new shares were created by the conversion of government-held preference shares into ordinary equity. The conversion, announced in January as RBS bought state-funded insurance against losses on risky assets it holds, relieves the bank of the obligation to pay coupon interest on the preference stock.

RBS, battered by hefty writedowns against risky debt-backed assets, surrendered a 58 percent stake to the government in October last year in return for 20 billion pounds ($29.84 billion) of emergency financial support.

RBS shares were down 7.4 percent at 27.6 pence by 5:35 a.m. EDT.

($1=.6702 Pound)

(Reporting by Myles Neligan; Editing by Hans Peters)

Royal Bank of Scotland United kingdom Investment