VTB, the second-largest Russian financial group, has cut its sukuk size from an original target of $300 million after postponing from last year, when defaults and Dubai World's woes hit the market, said a source.

VTB Bank now plans to launch a $200 million Islamic bond in the second half, the source said.

According to a VTB document seen by Reuters referring to the original planned launch, the three-year VTB-Leasing Sukuk Ltd issue had been scheduled 'for December 6 with a view of execution in mid-December 2009'. VTB declined to comment.

The sukuk market thrived in the run-up of the credit crisis because these vehicles, underpinned by tangible assets, were seen as relatively safe.

However, the sector was stung by the double whammy of the liquidity freeze in the financial crisis and defaults from high-profile Middle Eastern issuers Saad and Investment Dar.

State-owned Dubai World averted further havoc by promising last month to pay investors in the sukuk issued by subsidiary Nakheel.

VTB first mooted plans for a sukuk - to be issued by VTB Leasing (Europe) - in March 2009, and in the summer its investment banking unit VTB Capital set up an office in Dubai.

According the document related to the original planned launch, the sukuk, to be issued through a special purpose vehicle located in Bermuda, uses aircraft held by VTB Leasing as the assets which will underpin it.

Liquidity House and VTB Capital are named in the document as joined lead managers and bookrunners.-Reuters