Barclays is planning to issue about 5 billion pounds ($7.7 billion) of new shares to help plug a 7 billion pound capital shortfall triggered by new UK regulatory demands, two sources familiar with the matter told Reuters.

Barclays said on Monday it had been in talks with Britain's financial regulator and would update the market on its capital plans when the bank publishes half-year results on Tuesday. Two sources told Reuters the update would include the announcement of a 5 billion pound share sale.

The sources said the sale will be done as a rights issue, where existing investors are given the opportunity to buy new shares so their stakes will not be diluted.

One source familiar with the matter told Reuters the shares would be offered at a "significant double-digit discount" to Barclays' closing price of 308 pence, as is the convention in the UK. Barclays declined to comment.

Since the shares are sold to existing investors, the discount only matters if investors do not take up all of their allocation and the shares are then sold to outsiders. Such rights issues typically take between six to eight weeks to complete in the UK.

Barclays' shares fell as much as four per cent on Monday on reports that the bank would issue new equity. The bank was the biggest faller in Britain's FTSE 100 share index. Barclays' stock has more than doubled in value over the past 12 months.

Barclays and other European banks are under pressure to comply with new regulation to constrain the industry's risk-taking that could prevent a re-run of the taxpayer bailouts that followed the financial crisis.

Regulators' new focus is on banks' leverage ratios, which do not rely on banks' own risk assessments but express a bank's capital as a proportion of its overall assets.

This has raised the stakes for banks across Europe. Deutsche Bank is expected to unveil plans to shrink its balance sheet when it reports second-quarter results on Tuesday.

Barclays needs about 7 billion pounds to lift its leverage ratio to a 3 per cent minimum demanded by the UK regulator from an estimated 2.5 per cent, taking into account future losses on bad loans and mis-selling compensation.

Two of the people familiar with Barclays' plans said the bank's efforts were also likely to include convertible bonds, bonds that convert into equity if a bank's capital falls below a trigger point.

Barclays declined to comment further on its plans. The Prudential Regulation Authority (PRA) also declined comment.

HANDS TIED

One of Barclays biggest 20 investors told Reuters he had not been contacted about any capital raising plans.

"I'm not hugely happy about it but it's been enforced upon them. Does the bank definitely need this extra capital? Probably not. But if the PRA says it, then the bank's hands are tied," the investor said.

A sale of new shares by Barclays, meanwhile, could dent the British government's chances of offloading around a quarter of its 39 per cent stake in Lloyds Banking Group, worth about 5 billion pounds, later this year.

The Lloyds sale was expected in September or October, according to sources with knowledge of government thinking.

"If Barclays taps the market for 4 billion pounds of new bank equity, then it might take out some of the firepower ahead of Lloyds share sales later in the year," the investor said.

Barclays' plans could be determined by how much time it is given by the regulator to meet the leverage ratio target. It is expected to be given until the end of 2014 but a tighter deadline would make a sale of new shares more likely.

Sources familiar with the matter said last week that a rights issue was an option for chief executive Antony Jenkins, but not his preferred route. But Jenkins has remained in talks with regulators about how to hit the target over recent days and an equity fundraising has become more likely.

The bank has to make sure any bonds it sells would help its leverage ratio under the UK rules. To do this, the bonds would have to count towards Tier 1 capital, the key measure of a bank's financial strength. Similar bonds Barclays has sold, known as CoCos, have been classed as Tier 2 capital. - Reuters