* Luxembourg to sell rights and buy new shares with proceeds
* Luxembourg stake in BNP to drop to about 1 percent
* Says operation is cash-neutral (Updates with Luxembourg govt confirmation, detail)
BRUSSELS, Oct 7 (Reuters) - Luxembourg will partially participate in the 4.3 billion euro ($6.32 billion) rights issue of BNP Paribas, a spokesman for Budget Minister Luc Frieden said on Wednesday.
The Luxembourg state, which has a 1.17 percent stake in BNP, would sell its rights and buy new shares with the proceeds, the spokesman said, adding that the stake would drop to around 1 percent as a result of the operation.
The transaction would be cash-neutral for the Luxembourg government, he said.
BNP joined a rush of banks battling to pay back state support with the rights issue, launched last week.
BNP shares were down 1.3 percent at 55.27 euros at 0930 GMT, against a 0.1 percent fall of the DJ Stoxx European Banking index.
Luxembourg took a stake in BNP Paribas after the state-led carve-up of financial services group Fortis a year ago under which BNP eventually secured control of Fortis's former banking activities in Belgium and Luxembourg. ($1=.6802 Euro) (Reporting by Antonia van de Velde; editing by Simon Jessop)