By Yoruk Bahceli and Noele Illien

ZURICH UBS started selling Additional Tier 1 (AT1) bonds on Wednesday for the first time since it took over Credit Suisse, in a further sign that confidence has returned after the merger rocked the market for risky bank debt in March.

The shotgun merger led to a wipeout of $17 billion of Credit Suisse's AT1 bonds. A surge in AT1 bond yields that followed raised concern about the future of an asset introduced after the 2008 financial crisis to act as shock absorbers if bank capital levels fell below a certain threshold.

UBS, Switzerland's largest bank, said it would provide additional information about its bond issue when the offering was completed.

Its newest bonds are the first AT1 instruments UBS will sell that will convert into equity if its capital levels fall below a certain level, or a "viability event" such as receiving extraordinary government support, takes place, ratings agency S&P Global said. It assigned a 'BB' rating to the bonds.

The new feature requires approval at UBS's next annual general meeting, S&P said, but would help prevent bondholders from being written down as they were following the Credit Suisse-UBS tie up.

"Their structure is very new and shows they listened to investors who were angry about the permanent write-down feature," said Jerome Legras, head of research at Axiom Alternative Investments, who held Credit Suisse AT1 bonds before the March banking crisis.

The Credit Suisse AT1s wipeout spurned a number of claims against Switzerland's financial regulator FINMA, which inverted the long-established seniority of bondholders over shareholders over the assets of a company in distress.

That dented sentiment in the key market for bank bonds and prompted regulators in Europe and Asia to reassure investors over the seniority of bondholders.

European banks have resumed fundraising in the AT1 market since but a UBS deal has been long awaited as a next step for the market's recovery.

UBS's new AT1 bonds, U.S. dollar securities which the bank can redeem in five and 10 years, offer a yield of around 10% and 10.125% respectively, LSEG capital markets news service IFR reported.

That is similar to what Societe Generale paid for a similar U.S. dollar AT1 bond sale on Tuesday, though the French lender's bonds carried lower credit ratings than UBS's.

Joost Beaumont, head of bank research at ABN AMRO, said the deal was a "pivotal" moment, giving investors an opportunity to push back against UBS if they were still disturbed by March's writedown.

"It seems that markets, if this deal goes well, have moved (on)," he said.

UBS also said on Wednesday it intends to redeem the total outstanding a 700 million Singapore dollar AT1 instrument on November 28.

UBS shares were last down 0.9%, while the broader Swiss market was just 0.1% lower.

Prices on AT1 bonds from European lenders rose on Wednesday, while UBS's AT1s traded lower - a typical pattern as investors sell existing bonds to buy the new bond on offer.

(Reporting by Noele Illien and Yoruk Bahceli; editing by Dhara Ranasinghe and Elaine Hardcastle)