UPDATE 1-Bank of Ireland to raise over 500 mln euros of equity-source

(Removes reference to equity stake in the last paragraph)

DUBLIN, Nov 26 (Reuters) - Bank of Ireland (Irish: BIR.IR - news) will raise between 500 and 600 million euros of equity as early as next week as part of a key refinancing of 1.8 billion euros of state preference shares, a source familiar with the deal said on Tuesday.

The 15 percent state-owned bank faces a March 2014 deadline to refinance the shares before a clause under its state bailout kicks in, increasing the cost of buying them back by 25 percent, or 450 million euros.

It will raise the equity through a placement, rather than a rights issue, to retire around a third of the preference shares with the balance made up from the sale of a debt instrument to private investors at a profit to the state, the source said.

A spokeswoman for Bank of Ireland declined to comment on the placement and said the lender was considering a range of options for dealing with the preference shares.

The deal is unlikely to happen before the Thanksgiving holiday this week due to a large amount of U.S. investor interest and until Irish banks get the results of a balance sheet assessment carried out by the country's central bank.

The banks will get the results of the assessment this weekend and Bank of Ireland will likely give the market an update on the outcome when it announces the transaction.

A successful refinancing of the preference shares would be a big milestone for the bank, the sector and for the government ahead of its exit from an 85 billion euro EU/IMF (Frankfurt: MXG1.F - news) state bailout next month.

Ireland (Other OTC: IRLD - news) 's costly bank rescue after a property crash ravaged the economy and pushed its banks to the brink.

Bank of Ireland became the only domestically owned lender to escape full state control after a group of North American investors led by Wilbur Ross and Prem Watsa bought a 35 percent stake just months after Ireland signed up to an EU/IMF bailout three years ago.

The government sold 1 billion euros of Bank of Ireland debt earlier this year to further cut its exposure to the bailed-out bank.

($1 = 0.7404 euros) (Reporting by Dublin bureau and Laura Noonan in London; Editing by Carmel Crimmins and Erica Billingham)