* Issued $1 bln sukuk, called off conventional tranche
* Rated junk by all three major credit rating agencies
* Investors increasingly concerned by public debt level
* Officials reluctant to discuss possibility of Gulf aid
* Wednesday's sukuk pricing hurt existing bonds (Adds pricing details, analysis, allocation)
By Davide Barbuscia and Andrew Torchia
DUBAI, March 29 (Reuters) - Bahrain may return to the international debt market to raise funds later this year, its central bank said on Thursday, after investors' concern about its rising public debt level caused it to call off part of a planned bond issue this week.
The government sold $1 billion of 7-1/2-year Islamic bonds on Wednesday but decided not to go ahead with plans for an issue of conventional bonds, because it found the pricing demands of some investors too costly, banking sources said.
The deal illustrated the growing market pressures on Bahrain, which is financing a state budget deficit caused by low oil prices while it is rated as junk by all three of the world's top credit rating agencies.
In its statement on Thursday, the central bank described Wednesday's debt sale as successful, saying Bahrain chose the most efficient way to raise money. It said orders for the sukuk peaked at about $2.1 billion from over 100 investors.
"Bahrain has fostered a long-term relationship with debt capital markets investors, and we are pleased to see strong appetite to the transaction despite the volatile market conditions," said Salman al-Khalifa, the central bank's executive director of banking operations.
The statement added: "The kingdom is expected to raise financings through other sources of funding, including local debt capital markets, and potentially could seek to come back to the international debt capital markets at a later stage in 2018."
Fund managers said the 6.875 percent yield on the sukuk was extremely generous to investors. Analysts at Dubai's Mashreqbank estimated the deal offered investors a significant premium compared to debt issued by similarly rated sovereigns such as Jordan and Sri Lanka.
Initial price guidance for the sukuk was set in the 7 percent area, which caused yields on the country's existing sukuk maturing in 2024 and 2025 to jump by as much as 60 basis points as investors sold the older, less lucrative paper.
Bahrain has in the past been able to borrow comfortably from international markets because investors think it could count on financial support from its wealthier Gulf neighbours, particularly Saudi Arabia, in any crisis.
But in recent months, investors have become more concerned by Bahrain's mounting public debt level - estimated by the International Monetary Fund at 99 percent of gross domestic product this year - and the impact of rising U.S. interest rates on its debt.
The cost of insuring Bahrain's sovereign debt against default has risen by about 50 bps in the past two weeks, and at 275 bps, implies a 17.8 percent chance of default in the next five years.
At meetings with investors before the sukuk issue, Bahraini officials were pressed to discuss in detail the possibility of additional financial aid from other Gulf states, but they gave only vague answers, fund managers who attended said.
Thursday's central bank statement did not mention the matter, and Bahraini officials declined to comment to Reuters.
Adding to the uncertainty, the central bank has not published its monthly statistical bulletin since last November, leaving investors unsure of the level of its foreign reserves. It has not responded to queries about its data releases.
Thursday's statement said 59 percent of the sukuk was distributed in the Middle East and North Africa. The central bank did not name the buyers, but they may have included state institutions in the Gulf.
European buyers took 16 percent of the sukuk, Britain 14 percent and the United States 9 percent, with 2 percent bought by Asian investors.
BNP Paribas, Citi, Gulf International Bank, National Bank of Bahrain and Standard Chartered Bank arranged the deal. (Editing by Andrew Roche)