TEL AVIV (Reuters) - A group led by U.S. businessman Matthew Bronfman acquired a controlling 26 percent stake in Israel Discount Bank (DSCT.TA: Quote, Profile, Research) on Tuesday, a deal the government hopes will boost competition in the banking sector.

Bronfman´s group paid 1.3 billion shekels ($297 million) for the government stake in Israel´s third largest bank. The group also has an option to buy a further 25 percent at a similar price but Bronfman said it was too early to say whether he would do so.

"The Discount Bank transaction is an expression of confidence in Israel´s economy," Bronfman told a news conference at the signing of the deal, rejecting the notion he bought the stake for Zionistic reasons.

"We believe this is an opportunity to make a very good return ... The bank really started to turn around 18 months ago," he said. "This was a purely an economic interest.."

Most of the funds for the purchase came from a family trust, said Bronfman, son of World Jewish Congress head Edgar Bronfman.

"Three years ago the family decided to increase its involvement in the Israeli economy," he said, noting that the move would enable Discount to develop its activities in Israel and abroad.

Bronfman´s brother, Edgar Bronfman Jr., led a group of investors last year to buy Warner Music from Time Warner Inc (TWX.N: Quote, Profile, Research) for $2.6 billion.

Prior to the Israeli deal, the state held 57 percent of Discount and had planned to sell up to 51 percent to a private investor, with the remaining 6 percent to be offered to bank employees.

Yitzhak Klein, head of the bank privatisation agency MI Holdings, told Reuters that a new deal with employees had been signed and the 6 percent would remain in government hands for now.

According to the deal, employees will receive a bonus of 130 million shekels and an additional 120 million shekels in lieu of benefit they were to receive to buy the bank´s shares at a discount.

Shares in Discount closed 2.9 percent higher at 6.38 shekels -- a 52- week high.

THIRD TO HAPOALIM, LEUMI

The deal with Bronfman concludes years of failed attempts by the government to sell Discount and bolster competition with two bigger banks -- Hapoalim (POLI.TA: Quote, Profile, Research) and Leumi (LUMI.TA: Quote, Profile, Research) -- that largely control the sector.

Finance Minister Benjamin Netanyahu said he was seeking to complete the privatisation of Leumi by November.

"Our wish is for the buyers to increase competition with the other two big banks that dominate the Israeli market," said Finance Ministry Accountant-General Yaron Zelikha.

Israel´s government embarked on a plan two years ago to sell its stakes in state-owned companies. So far, Discount joins shipping company Zim, national carrier El Al Israel Airlines (ELAL.TA: Quote, Profile, Research) and Hapoalim as main companies the government has successfully privatized.

"The sale of the controlling stake in Bank Discount to private investors is an important and positive event for the Israeli economy, particularly the Israeli banking sector," said Hapoalim Chairman Shlomo Nehama in a statement, adding he welcomed "healthy and competition."

Nehama noted that the privatisation of Hapoalim, the largest Israeli bank, in the 1990s had resulted in a more efficient banking industry in Israel while "significantly boosting" the bank´s standing in the world."

Discount was hit hard in the early 2000s due to a heavy loan exposure to the battered technology sector. But belt tightening and an improved Israeli economy has turned the bank around.

Selling Discount was difficult because of its poor financial results and difficulties with the bank´s labor unions. But the state pressed on with the sale and initially received significant interest when the tender was issued in late 2004.

In the end, the Bronfman group was the lone bidder and offered 1.1 billion shekels -- below Netanyahu´s firm minimum price of 1.3 billion shekels. A deal was initially agreed two weeks ago but the signing was delayed due to Bronfman´s wedding.

The deal was made possible after the government´s bank privatisation agency drew up a proposal to resolve a labor dispute at the bank.

The Finance Ministry has been engaged in talks with Discount workers who have been seeking to guarantee that their rights are preserved in the sale.

During the privatisation process the workers went on strike, saying that some of their demands tied to the sale such as payments to employees were not met. (Additional reporting by Steven Scheer) (© Reuters 2005 02/01/05)