June 12 (Bloomberg) -- KeyCorp, Ohio's third-largest bank, fell the most in 20 years after saying today it will need to raise $1.5 billion because of a lost tax-case tied to leasing. The lender slumped as much as 11 percent in New York trading.

The bank will raise the fresh capital through a combination of common shares and convertible preferred stock, Cleveland- based KeyCorp said in a regulatory filing. The company declined $1.52, or 9.7 percent, to $14.19 at 9:38 a.m. in New York Stock Exchange composite trading, and is down 39 percent this year.

Extra taxes on leasing transactions are affecting U.S. banks already battered by record defaults on home loans. Wachovia Corp. said in April it would take a charge of $800 million to $1 billion on such transactions, which also were used by rivals such as Bank of America Corp. and Wells Fargo & Co.

KeyCorp expects a $1.1 billion to $1.2 billion second- quarter charge related to the case and plans to cut its dividend by 50 percent to save about $200 million a year, the company said. The bank will record a higher tax provision in future periods ``until the dispute is fully resolved,'' KeyCorp said in the filing.

The case, decided by a federal court in Ohio, involved leasing deals in tax years from 1999 to 2003. If not for the ruling, KeyCorp ``probably would not have considered the capital raising actions,'' Chief Executive Officer Henry Meyer said in a separate statement. The ruling ``forced'' KeyCorp's hand, Meyer said.

The bank is ``evaluating prospects for appealing the decision,'' the statement said.

KeyCorp said it was raising its loan loss reserves by about $600 million in the second quarter and said charge-offs for the year would be $750 million to $1 billion.

Dividend Record

The cut in the dividend to 18.8 cents from 37.5 cents will end 43 years of annual increases, Meyer said in the release. ``It was a record we were proud of, but we must recognize the current economic realities as we manage our business for the future,'' Meyer said.

The capital raising and charges are ``more bad news for Key'' and the company is ``looking at a pretty good-sized loss'' for the second quarter, said Oppenheimer & Co. analyst Terry McEvoy. He said a ``charge of that magnitude for the leveraged lease litigation is sizable to any company, definitely KeyCorp.''

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net

Last Updated: June 12, 2008 10:02 EDT