TOKYO, Feb 24 Citigroup C.N is in talks to raise its stake in scandal-hit Japanes

TOKYO, Feb 24 (Reuters) Citigroup is in talks to raise its stake in scandal-hit Japanese brokerage Nikko Cordial Corp. to more than one-third in a deal worth close to $3 billion, financial sources said on Saturday.

Nikko Cordial has been widely expected to court a strategic investor after admitting in December to falsifying documents and booking about $150 million in illegitimate profit at its merchant banking business.

The news sent shares in Japan's third-biggest brokerage into a tailspin and prompted the Tokyo Stock Exchange to put it under review for possible delisting. The bourse's decision is due in mid-March.

Citigroup already owns about 5 percent of Nikko, whose market value is just under $10 billion, after bailing it out during Japan's late-1990s financial crisis. The two also share control of Nikko Citigroup, Japan's third-biggest investment bank.

Raising its stake to 33.3 percent would cost Citigroup about 335 billion yen ($2.8 billion) at the current market price. Nikko shares ended 2.3 percent lower on Friday at 1,211 yen.

The sources, who declined to be identified, did not tell Reuters about the possible timing of the deal.

Spokespeople for Citigroup in New York and Tokyo had declined to comment on earlier Japanese media reports of Citigroup planning to raise its stake. Nikko issued a statement saying it could not comment about its negotations, without elaborating.

The Nikkei business daily reported on Saturday that Citigroup would aim to grab a one-third stake if Nikko is able to keep its stock listing. That would give it the power to block any major resolutions at shareholder meetings.

Citigroup would look to buy all of Nikko if it is delisted as such a move would likely make it difficult for the brokerage to procure funds, the newspaper said.

Citigroup fueled speculation about a possible Nikko buyout last month when it said it would establish a Japanese holding company, a move that would make acquisitions easier.

The U.S. lender has worked hard to patch up a rift with Japanese regulators, which ordered its private banking business to close in 2004 for a raft of violations including loose controls against money laundering.

Citigroup Chief Executive Charles Prince, who took over after the private banking scandal, has quietly visited Tokyo three or four times a year to try to smooth things over with the Financial Services Agency, a senior FSA official told Reuters.

It may also be the only potential suitor with enough cash to prevent a liquidity crisis if Nikko is delisted.

Citigroup could still face a rival bid from Japan's second-biggest bank, Mizuho Financial Group , which owns about 5 percent of Nikko Cordial. Hiroshi Saito, the aggressive head of Mizuho's corporate lending arm, has said he would be open to requests from Nikko for financial aid.

Mizuho plans to combine two of its group brokerages next year to create Japan's third-biggest securities house by revenues, surpassing Nikko. But it could be put off by the cost of taking on Nikko, which could run to several billion dollars more than its market price once liquidity guarantees are factored in.

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