UPDATE 4-Dubai may join fray for Spain property firm Colonial

(Adds Colonial opens its books, paragraph 3)

By Ben Harding and Sinead Cruise

MADRID/LONDON, Jan 31 (Reuters) - The Gulf's third biggest state-run investment agency could make a full takeover bid for property firm Colonial (COL.MC: Quote, Profile, Research), the Spanish company said on Thursday, possibly sparking a bid battle for the indebted firm.

Investment Corporation of Dubai, an $82 billion sovereign wealth fund, is interested in buying the stakes of former chairman Luis Portillo and the Nozaleda family, who together own over 52 percent of Colonial, the Barcelona firm said.

Colonial said it had opened its books to ICD, which has to bid for the whole company if it buys more than 30 percent under Spanish rules.

ICD's move would mark its first major foray into overseas markets since the company was established in 2006 to invest profits from Dubai's airline, financial services and real estate operations.

The company has been caught out by a sharp slowdown in Spanish property and the unwinding of derivative positions after racking up debts of 9 billion euros in a series of audacious takeovers just as Spain's property bull run peaked.

The stock has tumbled 48 percent since the start of December, also drawing interest from General Electric (GE.N: Quote, Profile, Research) and France's Gecina (GFCP.PA: Quote, Profile, Research) in recent weeks.

Shares in Colonial, which has a market capitalisation of about 2.8 billion euros ($4.16 billion), closed up 5.6 percent at 1.70 euros.