By Iain Withers and Amy-Jo Crowley

LONDON (Reuters) -British state-backed bank NatWest has agreed to buy 1.3 billion pounds ($1.6 billion) worth of its shares back from the government, as it edges closer towards private ownership 15 years after it was bailed out in the global financial crisis.

The deal will reduce the government's stake in the former Royal Bank of Scotland to 38.69% from around 41.4%.

The bank returned to majority private ownership in March 2022 after a similar block sale, as the government targets fully returning NatWest to private ownership by 2026.

NatWest shares gained 0.9% in early trading.

"Today's sale is another major milestone in returning NatWest to full private ownership as promised," Andrew Griffith, economic secretary to the Treasury, said in a statement.

NatWest said it had agreed to buy the shares at 268.4 pence per share, representing a further loss for taxpayers. The lender was bailed out for 45 billion pounds in 2008 at a price of 502 pence per share.

Banking shares have struggled this year through a period of wider industry turmoil sparked by the failure of several U.S. regional lenders and the emergency takeover of Credit Suisse, but have recovered some ground in recent weeks. NatWest shares are up around 15% on this time last year.

"The government clearly decided that now is a good moment to sell," said Victoria Scholar, head of investment at interactive investor.

Britain's finance ministry in April extended a trading plan enabling a series of smaller sales to investors by two years, as it sought to make progress on the privatisation despite the period of volatility.

This is the government's sixth block sale of NatWest stock to date. Britain owned 84% of NatWest at the peak of its ownership in 2008.

The government has long argued the rescue was needed and it is not viable to make a profit.

Banking analysts at Shore Capital said the transaction, which reduces NatWest's core capital ratio to around 14.4%, had been expected and its forecasts were unchanged.

"This transaction reduces government ownership below 40% and demonstrates positive progress on the bank's strategic priorities and the path to privatisation," NatWest CEO Alison Rose said in a statement.

($1 = 0.7923 pounds)

(Reporting by Iain Withers and Amy-Jo Crowley, additional reporting by Sarah Young; editing by Kate Holton, Jason Neely and Sharon Singleton)