By Niket Nishant

(Reuters) -PacWest Bancorp's shares rose nearly 18%, extending gains from the previous session after the lender's plan to sell $2.6 billion worth of its loan portfolio to build capital fueled optimism among investors rattled by a recent deposit flight in regional banks.

The stock was trading at $8.05 on Tuesday. If its gains another 5%, the bank's market value could breach the $1 billion mark for the first time in nearly three weeks.

Brokerage firm D.A. Davidson & Co raised its price target on PacWest to $8 from $3, saying the deal would help the bank build its common equity tier 1 (CET1) capital - a core measure of a lender's capital.

Earlier this month, the bank had said it was exploring strategic asset sales to sharpen focus on its core business segments as the regional banking sector grapples with its biggest crisis since 2008.

"While the strategy (to divest non-core assets) was put in place in early 2023, recent events have increased the import of asset sales as it relates to removing funding pressure from the balance sheet and building CET1 capital," the brokerage wrote in a note to clients.

On Monday, PacWest's shares surged nearly 20% after the company said it will sell 74 real estate construction loans with an outstanding balance of $2.6 billion to property firm Kennedy-Wilson Holdings Inc, at a discount of nearly $200 million.

"Given the extreme moves in the stock over the past quarter, being in the stock requires an ability to handle higher volatility and to react to the news flow," RBC Capital Markets analysts wrote in a note.

Shares of Fifth Third Bancorp and Zions Bancorp were also up nearly 1% and 2%, respectively.

The KBW Regional Banking Index, however, has lost nearly 4.6% since First Republic Bank became the third U.S. lender to collapse earlier this month.

(Reporting by Niket Nishant in Bengaluru; Editing by Shinjini Ganguli)