The government had previously been considering support worth over 1 trillion rubles ($12 billion) for VEB, Russia's fifth biggest lender in terms of capital.

The drastic scaling-down of the bailout plan reflects a fierce squeeze on Russian state finances, with the rouble hitting an all-time low on Thursday and oil prices languishing at their lowest since 2003.

The decision suggests that the finance ministry, which has pushed for belt-tightening, is holding its own in a battle for influence with other parts of the Russian government that had been advocating continued high spending.

VEB has long been used to finance unprofitable politically inspired projects, such as infrastructure for the 2014 Winter Olympics in the Russian resort of Sochi.

It now finds itself saddled with toxic assets totaling over $12.6 billion, according to analysts, and is at risk of failing to meet its foreign debt repayments, including about $900 million due this year.

Under a scenario now under discussion, VEB will sell liquid assets such as bonds this year and any losses it makes on these will be compensated from the budget, a senior official source and two officials from the ministry of finance told Reuters.

The senior official source, who like the others spoke on condition of anonymity because a final decision has not yet been made, said this scenario was now seen as the most likely to be implemented this year.

The whole operation could require between 100 and 200 billion rubles this year, according to one of the sources. According to the senior official's estimates, the aid should not exceed 100 billion rubles.

"The new bailout scenario will not be such a huge burden for the budget, although today it is difficult to predict VEB's market losses", said one of the finance ministry sources.

A ministry spokeswoman declined to comment, as did a spokesman for First Deputy Prime Minister Igor Shuvalov, who oversees the financial sector.

CONFLICTING GOALS

The Russian government is struggling to meet two hard-to-reconcile goals: to conserve budget funds which are under stress from the fall in oil prices, and to avoid a failure of VEB which would send shocks through the banking sector.

The bank's troubles have been exacerbated since it was cut off from Western capital markets by sanctions imposed over the conflict in Ukraine.

A previous bailout scenario, discussed in December, implied state support to VEB worth over 1 trillion rubles. Of that, 300 billion rubles would have come in 2016 in the form of domestic OFZ bonds to replace toxic assets of the bank. All bad loans were supposed to be transferred to the government.

The new scenario will focus on offloading VEB's liquid assets. It has 600 billion rubles in cash and liquid bonds, which is 15 percent of its total assets. It also owns equities worth 200 billion rubles, according to estimates from Anton Lopatin, an analyst of Fitch ratings agency.

Many of these assets were bought by VEB to support Russian companies after the previous financial crisis, such as its purchase in 2010 and 2011 of American depositary receipts issued by gas giant Gazprom.

With Russian and world markets in turmoil, this is a far from ideal time to sell such assets, said Viktor Nikolsky, analyst at S&P. In theory VEB could also sell real estate belonging to its subsidiary Globex Bank, but the property market in Russia is in decline as well.

People involved in the discussions about VEB cautioned that the scenario being proposed would not address the fundamental problem of the toxic assets.

"The government is deciding to shelve VEB's problem, as this bailout scenario will not address the toxic assets issue", said a source in VEB.

VEB's capital ratio is well above the 8 percent required by the central bank. However, it has to make provisions for a loan to Ukrainian borrowers, and for its Sochi-related lending, worth between 500 and 600 billion rubles, according to Fitch estimates.

Those provisions could push its capital level below the 8 percent threshold, the VEB source said.

The senior official acknowledged VEB needed more comprehensive help, but said that was not possible in the short term: "We should help VEB with its bad loans, but given the severe budget constraints, today we have no other options."

(Editing by Christian Lowe and Mark Trevelyan)

By Margarita Papchenkova and Darya Korsunskaya