-RBS sells shares in Citizens to banks underwriting IPO-sources

(Corrects stake in para 7)

LONDON, Sept 28 (Reuters) - Royal Bank of Scotland (LSE: RBS.L - news) raised 261 million pounds ($424 million) from selling more shares in its U.S. business Citizens (NYSE: CIA - news) after banks underwriting its stock market listing took up an option to buy extra shares, sources told Reuters.

RBS, which is 80 percent-owned by the British government, on Wednesday raised $3 billion from an initial public offering of Citizens shares on the New York Stock Exchange, through which it sold a 25 percent stake in the business.

Banks underwriting the IPO, which included Morgan Stanley (Xetra: 885836 - news) , Goldman Sachs (NYSE: GS-PB - news) and JP Morgan, were granted an option to buy a further 3.5 percent of the shares under the terms of the deal.

Sources familiar with the matter told Reuters on Sunday that they had taken up the option after shares in Citizens rose by 7 percent on their market debut, valuing the business at $13 billion.

RBS had originally planned to sell the shares at between $23 and $25, but ended up selling them for $21.50 each.

The bank was forced to cut the price due to investor uncertainty over Citizens' ability to meet profitability targets, analysts said.

RBS, whose stake in the 186-year-old Rhode Island-based bank will drop to 71.5 percent after the IPO, has said it intends to sell all of its stake in Citizens by 2016.

It is selling the shares to bolster its capital and appease lawmakers who want it to focus on lending to British households and businesses. (1 US dollar = 0.6155 British pound) (Reporting by Matt Scuffham, editing by William Hardy)