* Government to buy 8.7 pct stake or 20 mln shares

* Hypo says govt fund SoFFin to pay 60 mln euros for shares

* Full govt control required for recapitalisation

* Pretax loss 5.375 bln euro, sees at least 2 yrs of loss

(Adds CEO comments, details, background)

By John O’Donnell and Maria Sheahan

FRANKFURT, March 28 (Reuters) - The German government has agreed to take an initial 8.7 percent stake in stricken Hypo Real Estate HRXG.DE as a prelude to acquiring full control, the bank said on Saturday.

The move comes as Hypo said it lost 5.375 billion euros ($7.21 billion) before tax in 2008 and said it expected to remain in the red for at least two more years.

It said it needed state backing to meet the German bank regulator’s capital requirements. Hypo has already been propped up with more than 100 billion euros in guarantees, mostly from the state.

Hypo, Germany’s highest-profile casualty of the financial market crisis, was rescued by a government keen to protect Germany’s covered bond market, one of the biggest in the world. The German government is rushing through an emergency law that would allow it to expropriate Hypo shareholders and take full control of the Munich-based bank.

In an initial step, the government’s bank rescue fund SoFFin would buy 20 million new shares issued by Hypo in a 60 million euro capital increase. SoFFin intends to take full control, a prerequisite to recapitalisation, Hypo said on Saturday.

“We welcome this step,” Chief Executive Axel Wieandt said in a statement, adding the management board and supervisory board unanimously approved the measure.

The issue price of 3 euros per share, the legal minimum level, is more than double the market value of existing Hypo shares, which ended Friday’s trading session at 1.14 euros.

A finance ministry spokesman declined further comment on the Hypo move.

NATIONALISATION

Germany is following in the footsteps of Britain which has already nationalised a number of its banks, including Royal Bank of Scotland RBS.L as the global financial crisis wreaks havoc in the sector.

The German government is also preparing to take a 25 percent stake in the country's second-biggest lender, Commerzbank CBKG.DE, as part of an 18 billion euro rescue deal.

Other German banks, including HSH Nordbank [HSH.UL] and WestLB [WDLG.UL], have also needed rescuing.

Expropriating the bank’s shareholders has stoked controversy because such a step is linked in the minds of many Germans to crackdowns on private business by the Nazis and the government in communist East Germany. [ID:nLG677034]

The company’s 2008 pretax loss exceeded analyst expectations, which saw on an average loss of 4.83 billion euros, according to a Reuters poll. Net losses were 5.461 billion euros. [ID:nLQ951870]

For key facts on Germany’s proposed nationalisation law please double click on [ID:nLK546557] (Editing by Louise Ireland)