UK's LSE shares surge on historic $2.7 bln U.S. index deal

* LSE to launch $1.6 billion cash call in September

* Deal needs regulatory, shareholder approval

* Shares rise over seven percent (Adds fresh CEO, analyst quotes, updates share price, adds background, details)

By Freya Berry

LONDON, June 26 (Reuters) - The London Stock Exchange Group unveiled the largest acquisition in its history, snapping up U.S. group Frank Russell for $2.7 billion to boost its position in the world's largest financial services market and sending its shares surging.

Europe's oldest independent bourse said on Thursday it would fund the long-awaited acquisition of the index provider and asset manager, which analysts have described as strategically sound, with a $1.6 billion rights issue and debt.

It said the deal, which catapults it into third position in the booming market for exchange traded funds (ETFs) behind global market leaders S&P Dow Jones and MSCI, would boost earnings in the first full year.

The acquisition, which requires approval from regulators and shareholders, would also create a powerful index compiler with around $9.2 trillion of benchmarked assets.

"With this acquisition, we are strongly positioned for the changing dynamics in the global indices market with a best in class offering, which we believe will help deliver outstanding returns for our shareholders," said LSE Chief Executive Xavier Rolet.

Analysts welcomed a deal that gives the London bourse a market share of around 13 percent in the booming ETF market - passive and low-cost funds that provide an alternative to active fund management.

"Everyone has expected it," said Espirito Santo Investment Bank analyst Phil Dobbin. "People have been waiting to participate once it's been announced."

LSE'S STOCK RISES

The company's shares, which have risen around 15 percent since the start of this year, pushed more than 7 percent higher and were up 6.8 percent at 19.97 pounds by 1030 GMT, outperforming a flat London FTSE 100 blue-chip index.

The LSE, which said in May it was in exclusive talks with Russell's owners Northwestern Mutual about a possible purchase , said the enlarged company would yield annual cost savings of $78 million and boost annual revenues by $30 million by year three. Annual revenues would rise by almost $50 million by year five, it said.

The bourse said it was reviewing the position of Russell's investment management business, which has $256 billion in assets under management, but declined to comment on the options for a business analysts say does not provide an obvious fit.

"LSE is buying the whole Russell group but we think a sale of the investment management division is likely - it is probable that the complexity of the deal meant they were not able to organise a seller in advance," said Mark Thomas, analyst at Edison Investment Research.

Under the plan, Russell's Chief Executive Len Brennan will join the executive committee of LSE.

The rights issue - the LSE's first ever - is expected to be launched in September following shareholder approval of the acquisition.

Northwestern Mutual began exploring a Russell sale in January after deciding it was no longer a core part of its business. Reuters reported in April that Canadian Imperial Bank of Commerce, MSCI and several private equity houses were considering bids.

(Additional reporting by Kirstin Ridley and Kate Holton; Editing by Paul Sandle and Pravin Char)