SAO PAULO/NEW YORK (Reuters) - Citigroup Inc (C.N) plans to sell its 17 percent stake in Brazilian credit card company Redecard (RDCD3.SA), sources with direct knowledge of the plans said on Friday, potentially raising 3.05 billion reais ($1.27 billion) for the struggling U.S. banking giant.

Citigroup will likely sell most of the stake in a secondary stock offering, one source said. The bank is part of a controlling shareholder group but does not control Redecard on its own, so selling the stake makes sense, said another person familiar with the bank's thinking.

Brazil's Itau (ITAU4.SA), which is also part of the controlling group, is expected to buy a portion of Citi's stake, a source said.

Redecard processes MasterCard Inc (MA.N) and Diners Club transactions and has a market value of about 18 billion reais. Itau controls 46.4 percent.

Itau spokesman Paulo Marinho said the bank would not comment. Citigroup spokeswoman Liliana Mejia in Miami said the bank had no immediate comment.

The New York-based bank already reduced its stake in Redecard when it sold a 6 percent stake and raised 1.06 billion reais in January 2008, according to filings with the securities commission.

Redecard shares have surged 51 percent since reaching a record low in late October. The shares have risen 5.7 percent so far in 2009, in line with the 5.8 percent gain in the benchmark Bovespa index .BVSP of the Sao Paulo stock exchange.

($1 = 2.387 reais)

(Reporting by Elzio Barreto; editing by Jeffrey Benkoe)