Commerzbank will not transfer its property unit Eurohypo into a bad bank as part of plans to strengthen the Frankfurt-based lender's balance sheet, three people familiar with the bank's thinking said on Friday.

Senior managers at the bank are drawing up plans to increase the bank's capital -- a safety buffer to withstand the euro zone crisis -- by 5.3 billion euros (4 billion pounds), as demanded by the European Banking Authority.

In December, sources told Reuters that Germany's second-biggest bank had considered a scenario whereby Eurohypo could be sold to the German government at a loss.

The lender -- which has until January 20 to outline its plans -- now believes it can plug the capital gap without state aid and without transferring Eurohypo into a bad bank, the sources said on Friday. Commerzbank declined to comment.

Worries about Commerzbank's thin capital cushion have led the German government to revive bailout fund SoFFin.

SOVEREIGN DEBT PORTFOLIO

Commerzbank has been tasked with selling off real estate finance unit Eurohypo by 2014, but has struggled to find a private sector buyer.

It may have to take writedowns if it makes such a move, but it would still strengthen its balance sheet because it would no longer have to set aside extra capital for Eurohypo's risky assets.

Eurohypo also houses the lion's share of Commerzbank's sovereign debt portfolio -- at the end of September, Commerzbank had 13 billion euros of exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain.

A sale could free up about 5 billion euros in capital, which would go a long way towards filling Commerzbank's capital gap.

Analysts are sceptical about whether the Frankfurt-based lender can make it without some sort of help from the German government, which took a 25 percent stake during a previous bailout.

(Reporting By Alexander Huebner, Kathrin Jones and Philipp Halstrick; Writing by Edward Taylor; Editing by Mike Nesbit and Helen Massy-Beresford)