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* RBS to sell 20 percent stake in insurer
* Sale will cut RBS stake to under 30 pct
* RBS must sell all of Direct Line by end-2014 under state aid rules (Adds details, share price)
By Steve Slater
LONDON, Sept 19 (Reuters) - State-backed Royal Bank of Scotland is selling shares worth about 630 million pounds ($1 billion) in insurer Direct Line Group, putting it on course to shed all of its holding well before a regulatory deadline to do so.
RBS said late on Thursday it is selling 300 million Direct Line shares, including an over-allotment option set aside to meet strong demand, which in total represents 20 percent of the insurer.
It would leave RBS holding 427.4 million shares, or a 28.5 percent stake.
RBS has been ordered by European regulators to sell all of Direct Line - Britain's biggest motor insurer and one of the biggest home and general insurers - before the end of 2014, as a cost of taking a taxpayer bailout during the 2008 financial crisis.
It 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.
The sale will be made to institutional investors, probably before Friday's opening. It will have a minimal impact on the capital position of RBS, as the shares are being sold at close to the price they are valued on the bank's books.
RBS is 81 percent owned by the British government and European regulators ordered it to sell several businesses. The bank is shrinking its remaining business to focus mainly on retail and corporate banking in Britain.
Its turnaround is taking longer than that of rival Lloyds Banking Group, which was also bailed out in 2008. Britain sold shares in the lender earlier this week.
RBS said it does not plan to sell any more shares in Direct Line for at least 90 days.
Goldman Sachs, Morgan Stanley, RBC Europe and UBS were joint bookrunners for the placing.
The shares are expected to be placed at a discount to Thursday's closing price of 218 pence. The discount is typically 2-4 percent, which would value the stake at 630 million pounds. ($1 = 0.6226 British pounds) (Editing by Anjuli Davies and Anthony Barker)