By Matt Scuffham and Chris Vellacott
LONDON (Reuters) - State-backed Royal Bank of Scotland (LSE:RBS) said on Friday it raised 630 million pounds ($1 billion) by selling a 20 percent stake in Direct Line (DLGD.L), the latest stage in an EU-ordered disposal of Britain's biggest motor insurer.
RBS was ordered by European regulators to sell all of Direct Line - also one of Britain's biggest home and general insurers - before the end of 2014, as a penalty for its 2008 taxpayer bailout which left it 81 percent-owned by the government.
"This successful sale keeps RBS fully on track to meet its obligation to divest its stake in Direct Line by end-2014," said RBS's Finance Director Bruce Van Saun.
The sale was made at 210 pence a share, a 3.7 percent discount to Direct Line's closing price on Thursday and leaves RBS holding 427.4 million shares, a 28.5 percent stake.
A banking source close to the transaction said it was "comfortably covered" and priced at the top of a 208 pence to 210 pence range with demand for the shares exceeding the amount being sold within an hour of the sale being announced.
RBS sold just over a third of its interest when it floated Direct Line last October and it cut its stake just below 50 percent with a share sale in March. At that time it agreed not to sell any more shares until early September.
RBS said it does not plan to sell any more shares in Direct Line for at least 90 days. It said the proceeds from the sale would be used for general corporate purposes.
Shares in Direct Line were down 2.4 percent at 212.7 pence at 0742 GMT. Shares in RBS were down nearly 1 percent at 365 pence in early trade.
Goldman Sachs (GS.N), Morgan Stanley (MS.N), RBC Europe (RY.TO) and UBS (UBSN.VX) were joint bookrunners for the placing.
(Reporting by Matt Scuffham; Editing by Laura Noonan and David Cowell)