SEOUL (Reuters) - HSBC Holdings Plc is in the last stages of talks to buy 51 percent of Korea Exchange Bank (KEB) from U.S. fund Lone Star, valued at $4.5 billion (2.3 billion pounds), a newspaper said on Monday, sending KEB shares higher.

HSBC , Lone Star and KEB all declined to comment. But an analyst said the reported deal was highly likely to happen because the London-based bank would be regarded as a preferred buyer by the South Korean government after previous KEB suitor DBS Holdings broke off talks in June.

"HSBC already has been doing banking business domestically, and seems to have a high possibility to win government approval," Goodmorning Shinhan Securities' banking analyst Hong Jin-pyo said in a note sent to clients on Monday.

Shares in KEB rose 5.38 percent to 13,700 won by 0043 GMT, against the wider market's gain of 4.62 percent.

Dallas-based Lone Star has been looking for a strategic buyer for its remaining 51 percent stake in KEB, South Korea's fifth-biggest lender, with a market value of 4.3 trillion won ($4.5 billion) by Friday's close.

The fund had sold a 13.6 percent holding in the bank for $1.28 billion in June through a block trade, which already helped the private equity house recoup its original $1.2 billion investment in KEB.

With the South Korean government reluctant to allow new entrants to the saturated banking sector for several years, acquisitions might be the only option left to grow in South Korea.

Citigroup and Standard Chartered became major players through acquisitions of domestic rivals, which HSBC had also attempted to buy.

"HSBC is in the final stages of fine-tuning to sign a memorandum of understanding (MOU) to buy Lone Star's stake in KEB," the Korea Economic Daily quoted an unnamed financial industry source familiar with the sale process as saying.

"Both sides intended to seal a binding MOU soon, but because of the recent subprime mortgage issues, they are weighing the timing," the source said, adding the acquisition would be funded in large part by debt.

The sale process has been put off by a legal dispute.

South Korean prosecutors say a former government official colluded with a lawyer hired by Lone Star and KEB's chief executive to inflate KEB's losses, allowing Lone Star to buy it for around $900 million less than it was worth.

The legal disputes forced Lone Star to cancel a $7.3 billion deal last year to sell KEB to Kookmin Bank , South Korea's top lender.

Singapore's DBS Group had held talks with Lone Star for a possible purchase but ended talks, hinting at legal issues.

An official of the regulatory Financial Supervisory Commission told Reuters it would take account of a final court ruling before giving the nod to any possible KEB sale.

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