* Rights issue/convertible bond issue seen likely options
* Barclays must raise about 7 bln stg to meet demand
* Barclays' share sale could dent plans for Lloyds stake sale
* Shares in Barclays down 3.2 percent
Barclays will give an update on Tuesday on plans to meet tough new UK rules that could include a multi-billion pound share issue to help plug a shortfall in the bank's capital of about seven billion pounds.
Barclays said on Monday it had been in talks with Britain's financial regulator and would update the market alongside its half-year results published on Tuesday.
The Financial Times reported on Monday that Barclays would launch a rights issue to raise more than 5 billion pounds ($7.69 billion) and would also detail plans to shrink its balance sheet. The bank's shares fell more than four percent in anticipation of a flood of new equity.
Barclays declined to comment.
Barclays and other European banks are under pressure to comply with new regulation to constrain the industry's risk-taking that could prevent a re-run of the taxpayer bailouts that followed the financial crisis.
Regulators' new focus is on banks' leverage ratios, which do not rely on banks' own risk assessments but express a bank's capital as a proportion of its overall assets.
This has raised the stakes for banks across Europe. Deutsche Bank is expected to unveil plans to shrink its balance sheet when it reports second quarter results on Tuesday.
Barclays needs about seven billion pounds to lift its leverage ratio to a three percent minimum demanded by the UK regulator from an estimated 2.5 percent, taking into account future losses on bad loans and mis-selling compensation.
"There's a strong rumour going around the market today that Barclays are looking to do a rights issue and straightforward convertible bonds," said one debt capital markets banker.
Convertible bonds give investors an option to convert them into equity.
Speculation about the share issue pushed Barclays shares down sharply. The bank was the biggest faller in Britain's FTSE 100 share index. Barclays' stock has more than doubled in value over the past 12 months.
Barclays declined to comment further on its plans. The Prudential Regulation Authority (PRA) also declined comment.
One of Barclays biggest 20 investors told Reuters he had not been contacted about any capital raising plans.
"I'm not hugely happy about it but it's been enforced upon them. Does the bank definitely need this extra capital? Probably not. But if the PRA says it, then the bank's hands are tied," the investor said.
A sale of new shares by Barclays, meanwhile, could dent the British government's chances of offloading around a quarter of its 39 percent stake in Lloyds Banking Group, worth about 5 billion pounds, later this year.
The Lloyds sale was expected in September or October, according to sources with knowledge of government thinking.
"If Barclays taps the market for 4 billion pounds of new bank equity, then it might take out some of the firepower ahead of Lloyds share sales later in the year," the investor said.
Barclays' plans could be determined by how much time it is given by the regulator to meet the leverage ratio target. It is expected to be given until the end of 2014 but a tighter deadline would make a sale of new shares more likely.
Sources familiar with the matter said last week that a rights issue was an option for Chief Executive Antony Jenkins, but not his preferred route. But Jenkins has remained in talks with regulators about how to hit the target over recent days and an equity fundraising has become more likely.
The bank has to make sure any bonds it sells would help its leverage ratio under the UK rules. To do this, the bonds would have to count towards Tier 1 capital, the key measure of a bank's financial strength. Similar bonds Barclays has sold, known as CoCos, have been classed as Tier 2 capital.