UPDATE 2-Austrian lower house approves Hypo haircut law

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* Law forces losses on some junior creditors despite guarantees

* Needs to pass upper house as well, and be signed by president

* Former Hypo owner BayernLB faces 800 million euro hit (Adds details from parliamentary debate, context)

By Michael Shields and Angelika Gruber

VIENNA, July 8 (Reuters) - The lower house of Austria's parliament approved legislation on Tuesday that would wipe out the claims of some subordinated creditors of nationalised lender Hypo Alpe Adria, despite guarantees from its home province, entering uncharted territory for debt markets.

The government insists its move, which still needs the approval of the upper house and the president's signature, is a one-off step to ensure that Hypo's investors help to pay to wind down a bank that has cost 5.5 billion euros ($7.5 billion) in public aid so far.

The step is in line with European bank bail-in rules that take effect in 2016 that ensure taxpayers alone no longer shoulder the burden of propping up or killing off ailing banks.

But ratings agencies, senior bankers and the International Monetary Fund warn that Vienna has set a dangerous precedent, which may undermine confidence in other state guarantees that underpin billions of euros in debt.

"The situation with Hypo Alpe reflects badly on the Austrian banking system as a whole," said Dierk Brandenburg, a senior bank credit analyst at Fidelity.

"It creates uncertainty in the system, as investors will be thinking: 'If they can change the rules once like this, what's to stop them doing it again?'"

The law is likely to face legal challenges from investors including insurers and pension funds who hold the bonds.

Nevertheless, Austria sold 1 billion euros in bonds on Tuesday amid solid demand, including a 10-year deal at an average yield of 1.497 percent, which Finance Minister Michael Spindelegger said was a record low.

The coalition government has faced a public furore over the mounting costs of dismantling Hypo, which Austria had to nationalise in 2009 to avoid a collapse that would have sent a shock wave across the region.

NOT FAR ENOUGH

In Tuesday's debate, opposition parties complained the law did not go far enough to bail in Hypo investors. They said Austria should have let the bank go bust, an option that the government ruled out in March as too risky.

Letting Hypo go under would have bankrupted the province of Carinthia, whose unaffordable guarantees on Hypo's debt helped to fuel a decade of breakneck expansion at home and abroad that pushed the lender to the brink of insolvency.

Instead, Austria aims to impose losses on holders of around 890 million euros of Hypo debt guaranteed by Carinthia, and seize another 800 million from former Hypo owner BayernLB of Germany.

The legislation also sets up a "bad bank" that will absorb billions of euros' worth of Hypo assets to be wound down over years. The move will boost Austria's state debt to nearly 80 percent of gross domestic product, and nearly double the budget deficit to 2.7 percent of GDP this year.

Hypo is selling off its Balkan banking network under a break-up mandated by the European Commission. Spindelegger said a deal could wrap up within weeks.

Austrian President Heinz Fischer says the legislation needs a thorough legal review before he signs it.

Carinthia - which made millions by selling its Hypo stake to BayernLB - is fighting government demands that it contribute around 500 million euros to Hypo's costs. ($1 = 0.7331 Euros) (Additional reporting by Aimee Donnellan in London; Editing by Georgina Prodhan and Kevin Liffey)

UPDATE 2-U.S. in sanctions talks with Commerzbank and Deutsche -source

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(Adds comment from banks, analyst)

By Thomas Atkins and Alexander Hübner

FRANKFURT, July 8 (Reuters) - U.S. authorities have begun settlement talks with Germany's Commerzbank and Deutsche Bank over their dealings with countries blacklisted by the United States, extending a crackdown on European banks at a delicate point in U.S.-German relations.

The talks with state and federal authorities have just begun, a source with direct knowledge of the regulatory investigations told Reuters, and the timing of a deal is unclear.

Deutsche Bank and Commerzbank declined to comment.

Washington has come down hard on European banks that have evaded their sanctions, imposing a record fine on France's BNP Paribas last week and stoking resentment among bankers and officials at what they see as U.S. imperialism.

Commerzbank, Germany's second-largest lender, is 17 percent owned by the German government, and the settlement talks could further strain ties between Berlin and Washington, already at a low ebb due to allegations that a German man had worked as a double agent for U.S. intelligence.

Commerzbank is accused by U.S. authorities of transferring money through its U.S. operations on behalf of companies in Iran and Sudan and could pay at least $500 million in penalties, according to the New York Times.

The newspaper said a deal could be struck as soon as this summer and could pave the way for an agreement with Deutsche Bank. (nyti.ms/1xJyjeA)

Commerzbank would likely face a so-called deferred prosecution agreement that would suspend criminal charges in exchange for the financial penalty and other concessions, the report said.

In its last public comments on the matter in March, Commerzbank said it faced the threat of substantial U.S. fines or settlement costs. U.S. authorities had already forced it to surrender documents and the results of internal investigations, Commerzbank said then.

"The bank cannot rule out the possibility that it will pay a considerable sum of money in order to settle the case," Commerzbank said in its annual report.

Deutsche Bank, which has already paid over 5 billion euros in fines and settlements in the past two years, said in June it had done nothing wrong in its Iran dealings.

Germany's largest lender stopped doing new business with Iran in 2007 but remains engaged in several long-term loans or financial arrangements, some of which conclude in 2019, Deutsche said in the prospectus for a rights issue.

"We do not believe we have engaged in activities sanctionable under these statutes, but the U.S. authorities have considerable discretion in applying the statutes and any imposition of sanctions could be material," the bank said.

The risk of a fresh wave of U.S. fines weighed on European stock markets, with Commerzbank down more than 5 percent and Deutsche almost 2 percent.

"It's certainly a negative surprise, even if the market wasn't left unprepared following the fines at BNP," said Philipp Haessler, analyst at brokerage Equinet in Frankfurt.

Reuters reported last week that Deutsche Bank, Banamex USA, which is the U.S. arm of Citigroup Inc's Mexican banking group Banamex, and two major French banks - Credit Agricole and Societe Generale, were among those being investigated by U.S. authorities for possible money laundering or sanctions violations.

Investigations into the two French banks are not expected to be completed until after a settlement with Commerzbank, the source told Reuters.

FINES

After failing to land high-profile criminal cases stemming from the 2008-09 financial crisis, U.S. authorities have focused on other types of criminal activity within the financial industry, including money laundering, tax evasion and sanctions violations.

Analysts at investment bank Morgan Stanley say more pain is in store, saying banks have already paid $210 billion in fines in the past four years and expects another $75 billion in the coming three years.

Last week, France's largest bank BNP Paribas pleaded guilty to two criminal charges, agreed to pay $8.9 billion and have its right to clear certain dollar transactions suspended in order to resolve accusations it violated U.S. sanctions against Sudan, Cuba and Iran.

The size of the fine, the highest ever imposed for sanctions violations, and the suspension have caused concern in Europe and Asia that U.S. authorities are exploiting the dominance of the U.S. dollar to impose their own rules and standards on foreign firms and jurisdictions.

European concerns about heavy-handed U.S. sanctions have already reached the highest levels of diplomacy, with French President Francois Hollande in June raising the issue during a state visit by U.S. President Barack Obama.

Reuters could not immediately reach the authorities conducting the investigations - the U.S. Department of Justice, New York State's banking regulator and the Manhattan district attorney's office.

Commerzbank had 934 million euros ($1.27 billion) at the end of 2013 as provision for litigation risks, including a possible U.S. probe into whether the bank breached sanctions.

Numerous other banks, including Standard Chartered, Lloyds Banking Group and Credit Suisse Group have previously settled with U.S. authorities over allegations they violated sanctions, but their fines pale in comparison to the near $9 billion penalty imposed on BNP Paribas.

U.S. authorities said the size of the BNP fine reflected the extent of the wrongdoing. BNP employees concealed more than $190 billion in transactions between 2002 and 2012 for companies, governments and people in Sudan, Iran and Cuba. ($1 = 0.7345 Euros) (Additional reporting by Supriya Kurane in Bangalore, Karen Freifeld in New York and Till Weber in Frankfurt; Writing by Carmel Crimmins; Editing by Gopakumar Warrier, Anna Willard and Will Waterman)

UPDATE 1-Britain's Hague plugs Eurofighter on visit to India

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(Updates with British comments, credit line)

NEW DELHI, July 8 (Reuters) - Britain's foreign secretary lobbied India on Tuesday to buy Eurofighter military aircraft, suggesting that London has not yet abandoned hope of ousting France's Rafale from a multi-billion-dollar combat jet order.

William Hague was in New Delhi to meet Prime Minister Narendra Modi, who swept to power in a landslide general election victory in May on pledges to boost jobs, upgrade infrastructure and reinforce India's armed forces that are saddled with outdated equipment, much of it of Soviet origin.

"We have always had a strong belief in the capabilities of the Eurofighter and its potential," Hague told reporters at a joint briefing with British finance minister George Osborne.

"It's always available to those countries that are able and willing to purchase it," he said.

London hopes that a stalled deal for India to buy 126 Rafale jets from France's Dassault Aviation may yet collapse, perhaps opening the door to a new deal involving the Eurofighter Typhoon that is partly built in Britain.

Hague made it clear that Britain would not seek to pre-empt the talks on buying the French jets after Foreign Minister Laurent Fabius visited New Delhi last week. "We respect the process that is followed in India," he said at the end of a two-day visit.

Earlier, the Indian hosts confirmed that the question of replacing India's crash-prone fleet of Russian-built MiG-21 jets had come up in intergovernmental talks.

"The UK foreign secretary did indicate the technological advantages of the product that they have available," Syed Akbaruddin, spokesman for the Ministry of External Affairs, told reporters in response to a question.

Hague and Osborne visited the site of Mahatma Gandhi's assasination on Tuesday morning and announced that a statue of the civil rights leader would be erected in front of the British Houses of Parliament.

Hague denied there was a contradiction between seeking to sell weapons to India and celebrating its best known pacifist.

"We're dealing with the Indian government, we're not imposing anything on anybody. Of course friendly countries that wish to buy things from the United Kindom, they are able in compliance with our laws and regulations to buy those things," he said.

"There is no moral conflict."

Akbaruddin said that as well as defence issues, plans to build a 1,000-km (600-mile) industrial corridor between India's financial capital Mumbai and high-tech hub Bangalore figured during Tuesday's talks.

Osborne said Britain would open a 1 billion pound ($1.68 billion) credit line to invest in Indian infrastructure - the largest such facility extended to any sector in any country.

On Monday, he said in Mumbai on Monday that MBDA - a missile systems group in which BAE Systems has a stake - had signed a 250 million pound deal to supply defence equipment to the Indian Air Force.

Other shareholders in MBDA are Airbus Group and Italy's Finmeccanica. ($1 = 0.5956 British pounds) (Reporting by Frank Jack Daniel; Writing by Douglas Busvine; Editing by Louise Ireland)

UPDATE 2-Moscow accuses United States of "kidnapping" Russian hacker

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(Adds statement from his lawmaker father)

WASHINGTON/MOSCOW, July 8 (Reuters) - Russia accused the United States on Tuesday of violating a bilateral treaty and "kidnapping" a Russian accused of hacking into U.S. retailers' computer systems to steal credit card data.

The U.S. Department of Homeland Security on July 5 arrested Roman Valerevich Seleznev, the son of a Russian lawmaker, for what it said were crimes carried out from 2009 to 2011.

The 30-year-old's father Valery Seleznev, a deputy in Russia's lower house, said in a statement he "intends to take all necessary steps to protect his lawful interests."

Roman Seleznev was apprehended in an airport in the Maldives, the Russian Foreign Ministry said.

"We consider this as the latest unfriendly move from Washington," it said in a statement on its website.

"This is not the first time the U.S. side, ignoring a bilateral treaty ... on mutual assistance in criminal matters, has gone ahead with what amounts to the kidnapping of a Russian citizen."

Seleznev was indicted in Washington state in March 2011 on charges including bank fraud, causing damage to a protected computer, obtaining information from a protected computer and aggravated identity theft, the U.S. agency said in a statement.

The indictment said Seleznev hacked into websites ranging from those run by the Phoenix Zoo, a branch of Schlotzsky's Deli and many other small restaurants and entertainment venues around the country.

Relations between Russia and the United States are at a low ebb in Vladimir Putin's third term as president, with the former Cold War enemies divided over the conflicts in Syria and Ukraine as well as on human rights, democracy and defence matters. (Reporting by Doina Chiacu and Julia Edwards; Additional reporting by Alessandra Prentice; Editing by Jeremy Gaunt)