(Updates shares, adds IPO market context)

By Byron Kaye

SYDNEY, July 24 (Reuters) - Shares of Costa Group Ltd , Australia's top supplier of fresh fruit and vegetables, debuted at a discount to their issue price on Friday as volatile markets hampered demand for the country's No. 2 listing of the year so far.

The shares first traded at A$2.24, compared with their A$2.25 issue price, before falling further to settle at A$2.21 in a flat overall market.

The soft debut will be a further disappointment to the firm's previous owners, who include the family which started it as a grocery store in 1888, after they sold the shares near the bottom of a target range of A$2.20 to A$2.70.

The owners sold a 76 percent stake in the IPO, giving it a market capitalisation of A$696 million ($508.85 million) after listing. The company would have been worth A$864 million if it had sold the shares at the top of its target range.

After a record 2014, Australia's initial public offering market has slowed this year, with the total amount raised in the six months to June 30 down nearly two thirds from the same period a year earlier, Thomson Reuters data showed. The biggest IPO this year was the A$833 million raised by accounting software maker MYOB Ltd.

About $2 billion of planned listings in Australia have been pulled or deferred in recent weeks because of soft demand amid nervous trading.

Costa had nevertheless hoped, like other Australian food companies seeking listings, to appeal to investors because of a new free trade agreement with China and that country's growing demand for quality produce, dubbed a "dining boom".

Shares of dairy supplier Murray Goulburn have been trading at a small premium to their issue price since listing on July 3. Dairy and packaged seafood supplier Beston Global Food Co Ltd has meanwhile filed a prospectus to raise A$130 million before listing in August.

The Costa listing was managed by Goldman Sachs & Co [GSGSC.UL} and UBS AG.

($1 = 1.3678 Australian dollars) (Reporting by Byron Kaye; Editing by Michael Perry and Anupama Dwivedi)