Goldman Sachs Group Inc and China's ICBC <1398.HK> have been in discussions the New York bank to reduce its stake in the world's largest financial institution, according to a report on Tuesday.

Like other Western banks before it, Goldman has been expected to consider selling down part of its 4.9 percent ownership of Industrial and Commercial Bank of China <601398.SS> when the lock-up period ends at the end of next month.

That stake is worth around $8.5 billion, based on ICBC's market capitalization of about $178 billion which makes it the world's biggest bank by that measure. The Wall Street Journal reported on Tuesday that a Goldman sell down could raise around $1 billion for the bank by selling 15-20 percent of its holding.

ICBC signed a deal in 2005 to sell a 10 percent stake to a consortium that included Goldman, European insurer Allianz AG and American Express Co for more than $3 billion.

Equity capital market bankers in Asia expect the other two members of the consortium to consider selling their stakes as well, as their lock-up periods also end at the end of next month.

ICBC's shares soared after the bank went public in 2006, nearly tripling in price by November 2007. But the global economic slowdown has taken its toll on the bank.

ICBC shares fell 1 percent to HK$3.48 on Tuesday, not far above their IPO price of HK$3.07.

Major Western shareholders in other Chinese banks have also been trimming or selling their stakes to free up cash and help restore their battered balance sheets.

Bank of America raised $2.83 billion in January by selling part of its stake in China Construction Bank (CCB) <601939.SS>. Royal Bank of Scotland sold its 4.26 percent in Bank of China <3988.HK> <601988.SS> that same month, raising $2.34 billion.

Whether Goldman sells is difficult to call. It's been talked about ad nauseum since the CCB placement, said JPMorgan analyst Sunil Garg. Some of the commercial banks have had a bigger need for capital in their own markets than Goldman. But yes, its a possibility.

Garg pointed out that shares of Chinese banks that had Western sellers have widely risen since the sell down.

What that tells you is that most of these stakes were really financial stakes, rather than truly strategic. When it's a true strategic partner, it's viewed as a negative event.

Goldman has said the bank would like to repay the $10 billion it received from the U.S. government to get out from under executive pay and other restrictions tied to the funds.

(Additional reporting by Elinor Comlay and Joseph A. Giannone in NEW YORK; Editing by Lincoln Feast)