UniCredit SpA launched a 7.5 billion euro ($9.8 billion) rights issue at a massive discount on Wednesday, highlighting the struggle faced by European lenders under pressure to raise capital to counter a spreading debt crisis.

The issue, the biggest by a European bank for more than a year, is aimed at repairing its ravaged balance sheet and meeting stringent capital rules to help restore investor confidence.

The share offer, seen as a litmus test of market appetite for banking stocks in the new year, was priced at a 69 percent discount to Tuesday's closing price -- a much higher discount than that used by UniCredit's peers in recent rights issues.

Such terms may discourage other lenders from tapping the market to raise money and prompt them instead to shrink the loan book, sell assets or cut jobs and dividends.

UniCredit's rights issue provides a weak read-across to the rest of the sector and will put additional pressure on those other banks needing to boost capital levels, said analysts at investment bank Macquarie in a report.

The European Banking Authority has told banks they must find 115 billion euros of extra capital by the end of June to reach a minimum core capital level of 9 percent -- with lenders in Italy, Spain and Germany needing the most.

At 8.0 billion euros, UniCredit's shortfall is the biggest of any bank after Spain's Santander , which needs 15 billion euros to meet the EBA requirements -- a crucial plank of efforts by euro zone leaders to avert financial disaster.

Andrew Lim, an analyst at Espirito Santo, said the discount on UniCredit's capital increase was massive.

Whatever way you slice and dice it, UniCredit's discount is much bigger than for the other banks and that being the case, I think it's come as a bit of a shock to some investors, and I think some of them are just bailing out, he said.

UniCredit shares, which have lost more than half their value over the past year as the crisis spread to Italy, fell more than 10 percent in afternoon trade.

In another sign of the challenges faced by the bank, UniCredit said commitments from existing shareholders so far would cover up to 24 percent of the new share offer -- a lower take-up than had been anticipated.

The consortium of 15 banks underwriting the issue, led by Mediobanca and BofA-Merrill Lynch, was extended to spread the risk of part of the offer not being taken up by the market, and is now made up of 27 lenders.

NEW INVESTORS?

The rights issue, which will start on January 9 and close on January 27, represents 60 percent of the bank's current market capitalization of 12.5 billion euros.

Analysts calculated that the issue price would lead to a 65 percent dilution of earnings per share in 2012, and predicted the shares would remain under pressure.

We see risks that a substantial rump of the rights issue is left with the underwriters, creating a potential large overhang on the share price, said Macquarie analysts.

Another London-based analyst said that at 24 percent, the take-up by UniCredit's historic shareholders -- including cash-strapped foundations which hold around 13 percent of the bank -- was lower than expected.

From the comments we had had, we were expecting 30, 35 percent...That's a big adjustment, he said.

Days before the issue, Blackrock fund cut its stake in the bank to 1.7 percent from 4 percent. The Libyan Investment Authority, whose 2.6 percent holding was frozen during the civil war, has yet to say whether it will sign up to the offer.

That could open the door to new investors, with China's and Singapore's sovereign funds tipped as possible candidates.

UniCredit CEO Federico Ghizzoni announced the rights issue in November, together with 6,150 job cuts and a retreat from key operations to repair the bank's balance sheet after revealing a 10.6 billion euro third-quarter loss due to big writedowns.

The lender priced the two-for-one rights issue -- its third capital increase since 2008 -- at 1.943 euros per share.

The price represents a discount of 43 percent to the theoretical ex-rights price (TERP) -- the market price a stock theoretically has after a new rights issue.

Domestic rival Intesa Sanpaolo priced its rights issue last year at a 24 percent discount to the TERP. Smaller Italian lender Pop Milano

offered a 40 percent discount in October, while a rights issue by German group Commerzbank last May came at a 30 percent discount.

UniCredit shares shed 11.1 percent at 5.6 euros by 1445 GMT, having earlier been suspended from trading for excessive losses.

($1 = 0.7661 euro)

(Additional reporting by Michel Rose, Antonella Ciancio, Gianluca Semeraro in Milan and Simon Jessop in London; Editing by Dan Lalor and Jodie Ginsberg)

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