* Stock starts trading up 12 percent
* Pares gains later to trade at 22 euros vs offer price 21.50
* Rocket Internet likely to price at upper end, debut on Thursday (Adds Rocket Internet likely pricing, updates share price)
By Arno Schuetze
FRANKFURT, Oct 1 (Reuters) - Shares in Europe's largest online fashion retailer Zalando rose on their Frankfurt stock market debut on Wednesday, one of a flood of internet start-ups hoping to ride the coattails of China's Alibaba.
Zalando's shares had been priced at 21.50 euros each but the shares began trading up 12 percent at 24.10 euros. In the afternoon they pared gains to trade just above the offer price valuing the retailer at about 5.3 billion euros ($6.7 bln), almost the same as national flagship carrier Lufthansa .
Berlin-based Zalando started out selling shoes in Germany in 2008 inspired by the U.S. shoe and clothing retailer Zappos.com, now owned by Amazon.com. It competes with British online retailer ASOS, which, until its sales started unravelling this year, had been a great success story. .
Zalando's core markets are Germany, Switzerland and Austria and it sees huge potential because it says it has just half a percentage point share of a European fashion market worth 420 billion euros.
Germany has a string of internet start-ups poised to join the stock market with Rocket Internet - which helped to launch Zalando and numerous other e-commerce sites - taking the plunge on Thursday. People familiar with that transaction said they expect it to price at the upper end of the 35.50-42.50 euros a share range.
Separately, classified advertising firm Scout24 is expected to announce its listing next week.
E-commerce giant Alibaba successfully listed in New York earlier this month in the largest ever initial public offering, raising $25 billion and tempting others to try their luck.
"It feels a bit like the first day of school. Now the only thing we need to do is write good grades," said Zalando board member Robert Gentz after ringing the IPO bell at the Frankfurt Stock Exchange and bathing in confetti rain.
Last month Zalando unveiled a new advertising campaign, website, packaging and apps and saw first-half sales rise by 29.5 percent to 1.047 billion euros, producing a small net profit for the first time.
Germany's retail investor association DSW cautioned that investors should think before putting money into 'speculative investments' like Zalando, reminding them of losses many had endured after investing in internet companies at the turn of the century via Germany's so-called Neuer Markt.
Zalando, whose models took to the trading floor on Wednesday, is planning to use the 605 million euros proceeds from the IPO to invest in new technology. It wants more of its own fashion labels and the latest apps for smartphones to keep customers coming back. The retailer is also considering expanding further into eastern Europe.
Zalando had not priced its shares right at the top of its 18-22.50 euro price range because it wanted a smooth performance following its debut, several sources familiar with the pricing of the deal said.
"All the shares sold in the IPO stem from a capital increase. For the existing shareholders a strong after market performance was more important than maximizing IPO proceeds," one of the people said.
Swedish investment firm Kinnevik is Zalando's biggest shareholder and will have a post-IPO stake of about 32 percent. The investment vehicle of Germany's Samwer brothers, the founders of Rocket Internet, will have 15 percent.
Retail investors bought just 2 percent of the shares in the IPO, which was co-managed by Morgan Stanley, Goldman Sachs and Credit Suisse.
1 US dollar = 0.7933 euro Additional reporting by Emma Thomasson, Alexander Hübner and Andreas Kröner; editing by Elaine Hardcastle and David Evans