RSA short-sellers stay on sidelines as Zurich ponders bid

* Zurich Insurance (Xetra: ZFI1.DE - news) says considering bid for UK rival RSA

* RSA stock up about 20 pct; demand to borrow stock down

* Most analysts back deal in consolidating industry

By Simon Jessop

LONDON, July 31 (Reuters) - Hedge funds have yet to bet on a fall in RSA shares even though they have risen about 20 percent on the possibility of a bid from Zurich Insurance , pointing to market confidence a deal will be done.

Shares (Berlin: DI6.BE - news) in the British insurer posted their best one-day gain in 23 years on Tuesday, when its cash-rich Swiss peer said it was considering an offer. But short-sellers have since largely steered clear of punts on a correction, data showed on Friday.

In the process of short-selling, a hedge fund or other short-term investor will borrow the stock for a small fee and then sell it into the market, expecting to buy it back at a cheaper price when the stock falls. They then return the stock to its original owner and pocket the difference.

Some 3.1 million shares, or 1 percent, of the RSA stock that could be borrowed by speculators was actually out on loan as of midday on Friday, the data from industry tracker Sungard showed.

That is down more than 20 percent from the 4.2 million shares on loan a month earlier and compares with a FTSE 100 average of 6 percent.

Furthermore industry experts said short-sellers who had bet on a fall in the RSA share price before Zurich's statement on Tuesday, had played a role in the company's record rise, as they closed their positions.

"People have been closing their short positions as the price has risen, which suggests they're not ready to stick it in and hold on ... in the expectation of a massive correction," said David Lewis, regional head for Sungard unit Aztec Analytics.

"And people don't seem to be putting positions on in the expectation that that's going to be corrected, so it would kind of suggest there's some confidence in that deal going through."

Insurance companies across Europe are looking to broaden their businesses to get a better deal under new planned capital rules, and analysts expect that to drive a wave of deal-making across the fragmented industry.

Hot on the heels of deals elsewhere in the sector, including a $28 billion tie-up between ACE and Chubb, a potential RSA/Zurich union has drawn analyst support and underpinned a lack of demand to bet on a share price fall.

After rising 12 percent from a 20-month low on July 7, shares in RSA then soared around 20 percent on Tuesday to a high of 525 pence a share following the Zurich statement and also media reports the Swiss insurer could make a bid of around 550 pence.

Since then the stock has fallen 2.3 percent to 513 pence, as the market waits for a firm offer to materialise or for a rival bidder to emerge, such as German firm Allianz, French company AXA (Paris: FR0000120628 - news) or Italian rival Generali (Swiss: ASG.SW - news) . (Editing by Sinead Cruise and Pravin Char)