Commerzbank plans to retain earnings and cut risky assets to plug a 5.3 billion euro (4.17 billion pound) capital shortfall rather than seek a government bailout, although analysts warned it may still need state help if the economy worsens.

Germany's second largest lender said on Thursday it had already set aside 3 billion euros worth of the capital it needs to raise by June to shore up its balance sheet.

CEo Martin Blessing said the bank planned to decrease the need for Core Tier 1 capital by up to a further 3.3 billion euros to meet the full capital need, driving up its shares on hopes it might avoid state support.

Analysts had feared Commerzbank would have to resort to government help if it could not find ways to generate the capital.

Whether Commerzbank Chief Executive Martin Blessing really copes without a state bailout won't become clear until June, said Kepler Equities analyst Dirk Becker.

A key question is whether Commerzbank can maintain the same level of profitability it saw in 2011, as euro zone recession fears are stoked by the bloc's debt crisis. If it cannot, then it will not be able to retain more of earnings to build capital.

I wish him good luck, now that we are going into a recession, Becker said.

Commerzbank said it would achieve the capital target as long as there was no further deterioration in the macroeconomic environment, and in particular no further escalation of the sovereign debt crisis.

Its shares soared 9.9 percent to 1.55 euros a share.

Regulators from the European Banking Authority have demanded that the bank raise 5.3 billion euros in additional core capital by mid-2012 as part of plans to help European banks better withstand the euro zone debt crisis.

The EBA will start examining bank recapitalisation plans only after they have been vetted by national banking supervisors, who are due to receive them on January 20.

Commerzbank's plans include cutting holdings of riskier assets by a further 17 billion euros, retaining more of its profits and not writing new business outside Germany or Poland.

Commerzbank also said it would pay a higher amount to employees in shares rather than bonuses, a move that could free up 250 million euros in regulatory capital.

The main solution will be to cut the balance sheet size to less than 600 billon euros by 2014, from around 739 billion at the end of 2011. With a smaller balance sheet, Commerzbank only needs to refinance 6 billion euros worth of maturing capital markets liabilities in 2012.

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

(Reporting by Jonathan Gould and Edward Taylor)