* No decision yet to convert or sell state's notes in UBS
* Government in talks on options for stake
* Decision depends on stability of finance system
* State wants to recoup as much of investment as possible
* UBS shares up 0.6 percent
(Adds more analyst comment)
By Jason Rhodes
ZURICH, June 9 (Reuters) - The Swiss government is in talks over its investment in UBS AG with various parties but has not yet decided to convert its debt into shares or sell them, the finance ministry said on Tuesday.
The talks come as other global banks are starting to pay back state bailouts. UBS is also seen as keen to end state involvement soon but analysts expect the Swiss government will be cautious until it is sure the bank is back on stable ground.
Berne agreed last October to give the biggest Swiss bank a badly-needed 6 billion Swiss franc ($5.5 billion) cash injection in exchange for mandatory convertible notes (MCN) that would give it a stake of 9.3 percent. The lock-up period for conversion of the notes ended on Tuesday.
The finance ministry said it is examining various "transaction possibilities" in talks with several parties and the government will take a decision at the appropriate time.
It reiterated that the government only planned to stay involved for a limited period and said its main objectives were ensuring a stable financial system and the greatest possible recouping of the government's investment.
"The conversion will definitely come soon. None of the parties are interested in this carrying on as it is causing uncertainty," said Vontobel analyst Teresa Nielsen. "It is not about whether the government will convert, but when and how."
UBS, the world's largest wealth manager in terms of assets, was forced to accept government backing after massive investments in risky U.S. assets forced it to write down billions and led to it posting the biggest annual loss in Swiss corporate history for 2008.
SHARE SALE WOULD HURT STOCK
UBS shares were up 0.6 percent at 14.93 Swiss francs at 1018 GMT in line with a firmer sector index.
Julius Baer analysts said the fact the end of the lock-up had not prompted an immediate sale of the government's stake or a share placement was supporting the stock.
A conversion of the notes would have a dilutive effect and a sale on the market could also hit the stock, although analysts have already priced in the share dilution in earnings forecasts.
Lloyds Banking Group Plc announced on Monday it would repay UK government aid after selling new shares and Dutch insurer Aegon said on Tuesday it aims to pay back some of its bailout this year.
U.S. banks Morgan Stanley, JPMorgan Chase and American Express Co also said in the last week they would sell shares as they position to repay state relief
UBS, too, is seen by analysts as keen for the government to exit as quickly as possible, to remove state involvement and competitive disadvantages such as demands that it complies earlier than other Swiss banks with new rules on banker pay.
However, it gave a cautious outlook last month as it reported a big first-quarter net loss, contrasting with a strong three months for some of its major rivals and UBS board member Bruno Gehrig said at the weekend the bank was "not out of the woods yet" as it was still seeing outflows of client money.
"UBS does not have much room for manoeuvre if it wishes to buy the convertible back early to release it from the indignity of being partially owned by the state," said Helvea analyst Peter Thorne.
Vontobel's Nielsen said the Swiss government would be looking for big investors to take over its stake although she did not foresee interest from sovereign wealth funds, possibly forcing the state to gradually release shares onto the market.
"They would prefer to sell to one investor capable of buying 5 or 10 percent, or maybe two or three investors," she said. "Long funds are going to be the only ones interested, from asset management or maybe insurance companies."
The MCNs have a duration of 30 months, or until June 2011, and carry a 12.5 percent annual coupon that UBS must pay until maturity even in the event of a share conversion.
If the government converts at or below the minimum reference price of 18.21 Swiss francs it will receive the maximum of 330 million shares under the terms of the agreement.
The Swiss government is already in the money for a sale as UBS shares are trading above the break-even level of 12.50 Swiss francs, taking into account the 750 million francs annual interest payments it is guaranteed until the maturity date.
Earlier this month Abu Dhabi sold 1.3 billion shares in Barclays held via MCNs that had been due to convert by end-June, making $2.5 billion from an investment that helped the British bank through the crisis. ($1=1.096 Swiss Francs) (Writing by Emma Thomasson; Editing by Greg Mahlich and Simon Jessop)