(Adds Finance Ministry, trade union comment, background)
FRANKFURT, Aug 30 (Reuters) - Proprietary trading blunders pushed German lender WestLB [WDLG.UL] into a loss in the first half of the year, intensifying debate about the bank's strategic direction as regional state-backed lenders consolidate.
WestLB reported a pretax loss of 38 million euros ($52 million) in the first half but said it expected to be in profit for the full year. The bank made pretax profit of 239 million euros in the first half of 2006.
The Duesseldorf-based lender said it lost 604 million euros in spread positions on ordinary and preferred shares in the first half but managed to limit its overall trading loss to 309 million euros.
"Our profit has been severely hit by the losses incurred in our proprietary trading," WestLB Chief Executive Alexander Stuhlmann said in a statement on Thursday.
The bank's former chief executive and its chief risk officer stepped down after Germany's financial regulator said its supervisory board had not been properly informed about the matter.
State prosecutors this week launched an investigation into seven current and former board members in the affair.
Sources close to the prosecutor's office said former WestLB Chief Executive Thomas Fischer, who also chairs the non-executive supervisory board of German utility group RWE , was among those being investigated.
North Rhine-Westphalia's Finance Minister Helmut Linssen told the state parliament on Thursday that he assumed there would be no consequences for the three current board members under investigation by prosecutors.
Credit rating agency Standard & Poor's on Thursday said WestLB's ratings were unaffected by the weak earnings report because of the support it enjoys from its savings bank owners.
"In light of the slowdown in general market activity and widening spreads, we consider it highly uncertain that WestLB will meet its target of a modest pretax income in 2007," S & P said in a statement.
The share trading debacle, which involved shares in companies such as, and Metro , has increased calls on WestLB to find a partner.
WestLB CEO Stuhlmann said the bank was realigning itself strategically and would play an active role in the consolidation of Germany's landesbanks, which serve as regional wholesale banks to the community-based savings bank system.
"The managing board supports all the efforts being made by our shareholders to find an acceptable long-term solution which is in the interests of the bank, its owners and its employees as quickly as possible," Stuhlmann said.
Two savings bank associations that own about half of WestLB's shares this week voted to back a possible merger with fellow landesbank lender LBBW [LBBW.UL].
North Rhine-Westphalia's Linssen warned against over-hasty enthusiasm for a merger with LBBW, Germany's biggest landesbank.
The state, which holds a 38 percent stake in WestLB, would give priority to strengthening its position as a financial centre, Linssen said.
Linssen said he was considering involving a private investor to help develop retail business for WestLB.
Services trade union Verdi on Thursday said the possible sale of the state's stake to a private investor was out of the question and urged that WestLB's independent status be maintained.
"A merger of the two landesbanks would cost several thousand jobs," Verdi said, blaming WestLB's problems on the failure of its owners to agree on a business strategy in recent years.
The lender expects no big impact in the second half of the year from problems emanating from the market for risky mortgage lending in the United States. (Additional reporting by Matthias Inverardi in Duesseldorf)