* ANA says to raise up to 211 bln yen, including overallotment
* Says to issue up to one billion shares, including overallotment
* To use funds to buy planes, bolster finances
* Comes ahead of JAL's expected September IPO
* Shares fall 14 pct earlier after media reports plan
By Nathan Layne and Emi Emoto
TOKYO, July 3 (Reuters) - All Nippon Airways Co said on Tuesday it is raising up to $2.6 billion in a share sale to buy new planes and to bolster its finances as it faces a resurgent rival in Japan Airlines and increased competition from budget airlines.
The sale process started on Tuesday and the new shares will be priced on July 18, July 19 or July 20, the company said. Two sources had earlier confirmed a report by public broadcaster NHK that the company planned to raise capital, news which sent the airline's shares tumbling 14 percent.
ANA is raising the funds before Japan Airlines (JAL) launches its initial public offering, slated for September and estimated at around $8 billion.
JAL has emerged out of bankruptcy in 2010 with a clean balance sheet and record profits, raising pressure on ANA to bolster its financial standing.
"The difference in balance sheet strength between the two companies is substantial," Nicholas Cunningham, a transport analyst at Macquarie Capital Securities in Tokyo said before ANA confirmed the share sale.
"Although we do not consider ANA's balance sheet to be weak, the difference could impact investor sentiment towards the company relative to JAL".
ANA's net debt/equity ratio stood at 1.6 times as of the end of March, including off balance sheet items, compared to 0.2 times for JAL, Cunningham estimated.
The fall in ANA's shares after the reports of its capital raising plan reduced the firm's market value to around 485 billion yen. ANA issued its statement confirming the plans after the market had closed.
ANA said it will raise as much as 211 billion yen if an overallotment of shares is included. On that basis, the sale will dilute existing shareholder's stakes by 28 percent, Reuters calculated.
"The capital raising buys us time, allows us to accelerate our growth strategy," said an ANA executive, who declined to be identified because he is not authorised to talk to the media.
ANA has hired Nomura Securities and the Japan securities arms of JP Morgan and Goldman Sachs to be among the underwriters for the sale, which would follow a roughly 140 billion yen stock offering in July 2009, one of the sources said.
Mitsushige Akino, corporate officer at Ichiyoshi Asset Management, said the upside potential for ANA shares will be limited because investors will be aware that the JAL IPO is due.
"Investors will have to be selective on their choices between the two airlines," Akino said. "The new JAL is a competitive company."
JAL is ANA's chief domestic rival. It applied in June to re-list its shares in September following its planned IPO, which would be the second biggest this year after social networking giant Facebook raised $16 billion.
ANA has started to publicly question whether state support for JAL is creating an unfair playing field in Japan, pointing to a massive tax credit. The airline won't have to pay $4.5 billion in taxes on future profits even though it owes its survival to a taxpayer-funded restructuring.
Still, ANA has not paid corporate tax since 2009 after falling into loss following the global financial crisis. But if it stays profitable after swinging back into the black, the tax credits it has built up could disappear in the next financial year to March 2014.
ANA, the launch customer for Boeing's 787 Dreamliner, has ordered 55 of the aircraft, making it the centerpiece of its fleet plans. It said some of the funds from the share sale would be used to buy new Dreamliners to its fleet.
The airline had a fleet of 226 planes as of the end of March and carried 39 million passengers on domestic flights and close to 6 million on international ones in its last financial year.
The carbon composite plane is designed to be more fuel efficient and, therefore, cheaper to operate. It also boasts higher cabin pressure and humidity in order to make flying more comfortable.
The ANA executive said the competitive environment surrounding the airline had changed with the emergence in Asia of budget airlines and the pressures on full-service airlines.
ANA sees a need to bolster its balance sheet by raising new capital, the executive said. It returned operating profit of 97 billion yen in the year to the end of March 2012.