UPDATE 2-Israel’s Leumi says US tax settlement could exceed estimates

* Leumi says working with NY State regulators on settlement

* Says too soon to estimate final amount of deal

* Bank rejects $300 mln settlement offer from NY State

* Leumi has provisioned 950 mln shekels for final settlement

* Share price falls 1.9 pct in Tel Aviv trading (Adds details on other banks, analysts’ comments)

By Ari Rabinovitch and Steven Scheer

JERUSALEM, Oct 29 (Reuters) – Bank Leumi, Israel’s second-largest lender, said a settlement with U.S. authorities over possible tax evasion by the bank’s American clients could be far higher than previously estimated while also rejecting an offer from New York State.

The total penalty could reach as much as $600 million, based on Leumi’s previous estimate as well as a settlement offer from New York State’s financial regulator.

The bank has been negotiating with the authorities for months and had said it was close to a deal to pay 950 million shekels ($254 million) to the U.S. Justice Department – an amount the bank has already set aside.

The bank said on Wednesday it was also in contact with the New York Department of Financial Services, which regulates certain banks in the state, in an effort to reach a possible settlement.

Leumi said New York had made an informal offer over the phone to settle for $300 million, but that the bank’s lawyers had rejected the proposal immediately.

“This suggestion was made without any basis in documents or calculations,” Leumi said.

The bank said it was too soon to estimate the amount of the final settlements with both the U.S. government and New York State.

However, “there is a possibility that the final amount of the expense for ending the investigations with all the American authorities will be significantly higher than the amount included in the (previous quarterly) financial reports,” it said in a statement to the Tel Aviv Stock Exchange.

Leumi declined to comment further on the status of its federal negotiations. A spokesman said there had been no new developments since August.

The New York penalty is separate from the demands of the DOJ and stems from the structures the bank set up for its clients, which the regulator views as egregious, according to the person who did not want to be identified because negotiations are not public.

CRACK DOWN

U.S. efforts to crack down on Americans using offshore banks to evade taxes has been focused largely on banks in Switzerland, but banks in other countries, including Israeli banks through their Swiss units, are also under scrutiny.

Hapoalim, Israel’s largest bank, and Mizrahi-Tefahot, the fourth-largest, are also being investigated.

A spokesman for Mizrahi-Tefahot said the bank had provided regulators with statistical data but there were no new developments. In August, it said its Swiss unit was asked by U.S. authorities to provide more data.

A Hapoalim spokeswoman said the bank had nothing new to report.

Analysts say any fines for Hapoalim and Mizrahi-Tefahot woud be small since Leumi has the largest operations of an Israeli bank in Switzerland.

Leumi’s shares were 1.9 percent lower late on late on Wednesday in Tel Aviv and are down 2.3 percent so far this year, with the tax investigation weighing on Leumi as well as the banking sector.

“Once finalised, the settlement will lift an overhang from Leumi’s shares,” said Barclays analyst Tavy Rosner, who rates Leumi “overweight”.

Citi analyst Michael Klahr said an additional $300 million penalty is worth 0.4 percentage point in Leumi’s core Tier 1 capital, which was 9.3 percent at the end of the second quarter.

Israeli banks will report third-quarter results in the second half of November and will likely provide an update on the progress of the negotiations.

Leumi has said the investigation covers the period between 2002 and 2010 and has urged U.S. clients to disclose information about their accounts to the U.S. authorities.

The probe at Israeli banks started in 2011, two years after Swiss bank UBS was fined $780 million and also had to hand over client data to the United States. In May, Credit Suisse agreed to pay more than $2.5 billion in penalties for helping Americans dodge taxes.