BNP Paribas SA , France's biggest listed bank, said on Thursday it would sell more than half its stake in real-estate firm Klepierre SA to Simon Property Group , reaping a 1.5 billion euro (1 billion pounds) capital gain.

The deal takes BNP a step closer to meeting tougher capital requirements under new banking regulations, intended to crack down on risk-taking, that have forced many European banks to slash their balance sheets and sell assets to beef up capital.

It also gives Simon, the largest U.S. owner of malls and outlet centres, a brood footprint in European retail real estate. The deal will see Simon become Klepierre's largest shareholder with a 28.7 percent stake. BNP still holds 22.2 percent in the real estate company and there is speculation that a full exit of Klepierre is in the cards.

Although Simon Property says it does not currently intend to increase its stake (in Klepierre), it seems to us that in the medium-term this is the direction we're going in, Natixis analyst Serge Demirdjian said.

BNP shares closed up 3.7 percent at 37.00 euros. The bank's stock has gained 21.9 percent so far this year, outperforming a 15.9 percent rise in the STOXX Europe 600 index <.SX7P>.

BNP is targeting a 9 percent core Tier 1 capital ratio under the new Basel III regulations for January 1, 2013. The Klepierre deal lifts its ratio by 0.32 percentage point and reduces risk-weighted assets by around 25 billion euros, BNP said.

BNP is targeting a further 3 billion-euro cut in risk-weighted assets at its investment portfolio, which includes a stake in insurer Axa SA and private equity assets.

The deal also marks the second time in as many weeks that BNP has sold assets to a U.S. buyer. Last month BNP sold a $9.5 billion (6.0 billion pounds) portfolio of energy loans to American bank Wells Fargo & Co , a sign of how European banks' drive to reduce U.S. dollar funding is offering opportunities to rivals Stateside.

The property sector is seen as being particularly ripe for mergers and takeovers, not just because banks are putting assets on the block, but because sluggish economic growth in Europe is pushing property companies to expand via acquisition.

There's not much in the way of rental growth, capital growth, and so companies are looking at means of expanding elsewhere, Investec analyst Alan Carter said.

Simon is paying 28 euros per Klepierre share, or a premium of 19.7 percent from Wednesday's closing price. Analysts said that was higher than expected. Klepierre rose 8.4 percent to 25.35 euros on Thursday.

The price of 28 euros is above expectations for between 24 to 26 euros, Natixis' Demirdjian said.

M&A UPTURN

Simon Property Chief Executive David Simon will become the chairman of Klepierre's nine-member supervisory board under the terms of the deal. Two other Simon representatives will also join.

That will give Simon a fair amount of influence over the company's future, Green Street Advisors analyst Cedrik Lachance said. Simon was able to acquire the stake at a slight discount to net asset value, he added.

In 2010, Simon had $1 billion (632 million pounds) in assets in Europe but has since sold both of what had been its major holdings there, the most recent sale involving its 49 percent interest in Gallerie Commerciali Italia in the first quarter.

The stake in Europe's second-largest retail real estate owner with assets in 13 countries plus a development team, would mark Simon's return to the continent.

It's an attractive deal from the standpoint of price and the elements and the influence that Simon now gained on the company, Lachance said.

Simon Property will receive Klepierre's dividend to be declared in April.

The Indianapolis, Indiana-based company has also agreed to acquire a stake in 26 assets of Mills LP belonging to its joint venture partner, Farallon Capital Management, for $1.5 billion (948.1 million pounds).

In connection with both deals, Simon said it plans to sell 7 million shares and granted underwriters and option for up to 1.05 million more shares to cover any overallotment. It also said it would issue three new series of senior unsecured notes with a total principal amount of $1.5 billion (948.1 million pounds). The stock issuance helped send shares of Simon down 1.6 percent to trade at $136.00 (85.97 pounds) in afternoon dealings on the New York Stock Exchange.

With many of Europe's property companies trading at significant discounts to net asset value, analysts said other cash-rich overseas companies like Westfield Group were possibly eyeing takeovers or the option to snap up stakes.

The sector, particularly shopping mall operators, faces dismal rental and growth prospects as recession and the impact of Internet shopping have hit property values and tenant demand.

We have been arguing that mergers and acquisitions (in real estate) will come this year, or will be intensifying, said JPMorgan Cazenove analyst Harm Meijer. I don't rule out Simon doing something else as well, given their track record and underrepresentation in certain markets like the UK.

Simon Property unsuccessfully attempted to acquire British mall owner Capital Shopping Centres Group Plc , in which it presently owns a 4 percent stake, early last year.

Do I think that it's feasible that within the next 5 or 10 years ... that Simon or Westfield end up owning one or two or three of Europe's, including the UK's, largest companies? Yes, I think that's feasible, Investec's Carter said.

Simon Property revised its full-year outlook and now expects 2012 funds from operations per share to be between $7.35 (4.65 pounds) and $7.50 (4.74 pounds), up from a previous forecast of $7.20 (4.55 pounds) to $7.30 (4.61 pounds).

Lazard, JPMorgan Securities LLC and Goldman Sachs & Co are serving as financial advisers to Simon on the Klepierre transaction. Bank of America Merrill Lynch is serving as Simon's financial adviser on the Mills transaction.

(Additional reporting by Ilaina Jonas in New York, Eileen Anupa Soreng in Bangalore)