* NAB plans to list Clydesdale Bank by end of year
* UK regulator orders 1.7 bln stg capital support
* Covers potential costs for past mis-selling
* Plans to sell 20-30 pct stake to institutions (Adds further details on planned Clydesdale IPO)
By Swati Pandey and Matt Scuffham
SYDNEY/LONDON, May 7 (Reuters) - National Australia Bank plans to raise $4.4 billion from investors after being told by Britain's financial regulator to provide $2.6 billion in capital support to its UK business before a planned demerger.
The A$5.5 billion rights issue is one of the biggest in Australian corporate history. It will also enable the country's biggest lender to shore up its balance sheet ahead of an expected tightening of capital requirements at home.
NAB said on Thursday it will sell between 20 to 30 percent of its British business, which includes Clydesdale Bank and Yorkshire Bank, through an initial public offering in London this year. The rest of the shares will go to NAB shareholders.
The Australian bank had previously said it was examining a range of options for the business, which has been plagued by bad debts and misconduct charges.
In order to clear the demerger, Britain's financial regulator told NAB that it would need to provide an additional 1.7 billion pounds of capital to shield Clydesdale against future costs for past misconduct.
That will cover the British business against further charges relating to the mis-selling of loan insurance to individuals and hedging products to small businesses, for which NAB has already set aside a combined 1.4 billion pounds.
The arrangement is similar to a guarantee provided by Lloyds Banking Group when it spun off TSB last year and may make the bank more attractive to potential investors.
PROFIT RISE
Clydesdale on Thursday reported a 33 percent increase in pretax profit in the first half of its financial year, benefiting from a reduction in bad loan charges.
The bank took a significant step towards cleaning up its balance sheet last year through the sale of a 625 million pound portfolio of non-performing commercial property loans.
Industry sources say investors may be attracted to its prospects under its well-regarded new chief executive, David Duffy, who will join the bank later this year from Allied Irish Banks.
Although an IPO of Clydesdale is NAB's preferred option, Clydesdale's acting chief executive Debbie Crosbie told Reuters NAB would still consider outright offers.
Analysts are expecting further consolidation among smaller British banks as they look to obtain the scale required to effectively compete with larger rivals.