UPDATE 1-XL Group to buy Lloyd's of London insurer Catlin for 2.79 bln stg

(Corrects paragraph 1 to say "Dublin-based" instead of "Bermuda-based")

Jan 9 (Reuters) - XL Group Plc (NYSE: XL - news) will buy underwriter Catlin Group Ltd (LSE: CGL.L - news) for about 2.79 billion pounds ($4.22 billion), giving the Dublin-based insurer and reinsurer a bigger chunk of the Lloyd's of London market.

The offer of 388 pence in cash and 0.13 new XL share values each Catlin share at about 715.3 pence - a premium of 8.3 percent to the stock's close on Thursday.

Shares (Dusseldorf: DI6.DU - news) in Catlin, the biggest syndicate on the Lloyd's underwriting floor, were trading at 690 pence in late morning business on the London Stock Exchange (Other OTC: LDNXF - news) .

XL Group's shares were untraded before the bell in New York after closing at $35.42 on Thursday. The company' shares fell as much as 4 percent in December when news of its interest in Catlin emerged but they have since recovered.

Catlin, which sells insurance for everything from flooding to kidnapping and is also headquartered in Bermuda, will pay a final dividend of 22 pence, reversing an earlier decision to forego the payout after the approach from XL Group.

At that time, XL Group - which has a market value of more than $9 billion - had offered 2.53 billion pounds for Catlin.

"This bid both highlights the attractions of Lloyd's for external players and increases the scarcity value for the remaining companies," Shore Capital analyst Eamonn Flanagan said in a research note.

Incoming (Other OTC: ICNN - news) stricter capital rules for European insurers have spurred deal activity in the industry.

Earlier this week, brokerage Westhouse Securities flagged Novae Group Plc (LSE: NVA.L - news) and Lancashire Holdings Ltd as the next possible targets. ($1 = 0.6612 pounds) (Reporting by Richa Naidu in Bengaluru; Editing by Savio D'Souza and Ted Kerr)