BlackRock has agreed to buy Barclays Global Investors to create the world's biggest asset manager in a $13.5 billion deal that British bank Barclays hopes will put to rest concerns about its capital.

The cash and shares deal, unveiled in the United States late on Thursday, will see Barclays take a 19.9 percent stake and two seats on the board of the enlarged group, to be called BlackRock Global Investors.

Britain's second biggest bank said on Friday a net gain of $8.8 billion would be used to bolster its capital and lift its core Tier 1 capital adequacy ratio by 1.5 percentage points to around 8 percent.

Shares in Barclays were down 4.2 percent at 292 pence by 1405 GMT (10:05 a.m. EDT) on concern the deal raises dependence on volatile investment banking and after a 7 percent rise this week ahead of the widely anticipated deal.

The share price has soared more than five-fold in the last three months, after crashing to a 24-year low on fears that it might need taxpayer funds.

This (BGI) was always a core part of the business until recently but the reality is they need as much capital as possible for the core banking and investment banking business, and they've been able to get a very good price for the asset, said Colin Morton at Rensburg Fund Management, which owns Barclays shares.

New York-based BlackRock is paying $6.6 billion in cash and the rest in stock. It is raising $2.8 billion from the sale of 19.9 million shares to a group of unnamed institutional investors, which people familiar with the matter had expected to include Middle East sovereign wealth funds.

The other new investors would get a stake of about 10.5 percent in BlackRock and the deal will dilute the stakes of Bank of America to 34 percent from 49 percent and cut PNC Financial Services'
holding to 23 percent from 33 percent, according to Reuters estimates.

Shares in BlackRock rose 2.3 percent in New York on Thursday to close at $182.60 but fell 5.7 percent in morning trading on Friday.

San Francisco-based BGI's $1.5 trillion in funds will give BlackRock $2.8 trillion in assets under management, catapulting it to a dominant position with twice the assets of nearest rival State Street .

ALL CHANGE

The sale strengthens Barclays' balance sheet after the bank refused aid from the British government that some of its rivals accepted as the global financial crisis engulfed the industry.

Chief Executive John Varley said that it will make Barclays one of the best capitalised banks in the world and he had no worries about the bank's capital position.

Rising regulatory pressure to keep asset management and investment banking businesses separate and client preferences for independent fund managers also meant other banks were likely to split off fund arms, and the industry would consolidate.

There are a number of pieces of empirical evidence saying this is the way the industry is trending, that's partly a consequence of client preference and partly a consequence of regulation, Varley said. It's amplified in our case by the fact that the Lehman transaction has changed the scale of Barclays Capital.

Barclays, which bought the U.S. investment banking business of Lehman Brothers in September, said its trading performance up to the end of May had been generally consistent with trends it reported on May 7.

Barclays has agreed not to sell any of its BlackRock shares in the first year without the asset manager's consent, and no more than half its holding in the second year.

Varley and Barclays President Bob Diamond will each get a seat on BlackRock's board.

Diamond will receive a net consideration of $36 million before any deductions from shares he holds in BGI. He will have paid $10 million to acquire the shares since 2003, Barclays said.

Other BGI staff are in line for a windfall from a lucrative employee share ownership plan. If they exercise options staff will own 9 percent of BGI.

BGI is staffed by academics from a range of disciplines from economics to engineering, attracting graduates from the nearby University of California at Berkeley.

The deal scuppers the planned $4.4 billion sale of iShares, the exchange traded funds arm of BGI, to buyout firm CVC. CVC has until June 18 to improve its offer, but it is unlikely to counterbid as it wanted iShares rather than all of BGI, a person familiar with the situation told Reuters. It will get a $175 million break fee.

(Additional reporting by Paul Hoskins and Simon Meads in London)

(Editing by Greg Mahlich and Andrew Callus)