* German bank aims to boost bonuses after cut last year
* Bank's trading lags Wall Street rivals
* CEO Cryan says bank is "recovering step by step" (Adds details)
By John O'Donnell and Tom Sims
FRANKFURT, Oct 26 (Reuters) - Deutsche Bank, which is struggling to keep pace with Wall Street firms, will pay higher bonuses in 2017 after a sharp cut last year, one person with knowledge of the plan said.
The final bonus "pool" will largely depend on how Europe's most prominent investment bank fares through the end of the year as well as what its competitors pay.
A resumption of big bonuses is not a sign of a turnaround at the once high-flying investment bank, but an effort to prevent defections.
Deutsche Bank will have to tread carefully on its payout levels because credit rating agencies are keeping close tabs on them and shareholders are frustrated by its slow turnaround.
But a return to bigger bonuses would be a relief for bankers at Deutsche Bank where total bonus payments dropped from 2.4 billion euros in 2015 to 546 million euros last year after a multi-billion dollar legal fine for the sale of toxic debt.
"We want to return to the usual bonus system this year," one person with direct knowledge of the matter said.
John Cryan, Deutsche Bank's chief executive, conceded that a recovery would take time in a letter to staff on Thursday.
The still fragile state of Germany's biggest bank was underlined when it reported a drop of almost 25 percent in third quarter investment bank revenues and a drop of more than a third in its bond trading division.
Deutsche Bank lagged Wall Street rivals, where investment banking revenue rose by 8 percent, according to Barclays, and bond trading fell by a less dramatic 22 percent.
A spokesman for Deutsche Bank said its bond trading dip had been 24 percent when calculated in the same way as U.S. rivals, although investors were nonetheless disappointed.
"Deutsche Bank is losing market share in investment banking. This is the third disappointing quarter running. A turnaround cannot be expected soon," said Helmut Hipper of Union Investment, a shareholder in the bank.
Cryan, however, now intends to make good on a pledge made in January 2017 at the time of the cutbacks to "return to our normal compensation programmes".
European rival Barclays responded to a dip in its trading income on Thursday by cutting the bonus pool.
Deutsche Bank's once hot-shot investment banking division has dropped in rankings and market share in recent years, partly by design as it aims for a leaner approach focused on Europe and enabling German companies to tap international finance.
But bank executives acknowledge clients went elsewhere as it battled a barrage of law suits and had to raise more capital.
In the first half of this year, Deutsche Bank's investment bank maintained its sixth place ranking in global league tables compiled by Coalition, but it slipped one notch to eighth in the Americas and one notch to fourth in Asia.
It has been pushing to regain lost ground, for instance, in advising large companies and refocusing on Germany, but expects its turnaround to take some years.
For the ratings agencies which evaluate the risks to firms such as Deutsche Bank, bonuses will have to fit tight cost constraints.
"Deutsche has a hard total cost target of 22 billion euros. But they have ways to go there still and the picture is blurry and bonuses have to fit into that," Peter Nerby of rating agency Moody's told Reuters.
"Costs are too high and more needs to be done there," said Richard Barnes, who oversees the bank's rating at S&P, adding that Deutsche Bank's revamp could see it lose ground to rivals.
"There's a danger that they become very inwardly focused on their restructuring while rivals banks are on the front foot." ($1 = 0.8460 euros) (Additional reporting by Arno Schuetze in Frankfurt; Editing by Adrian Croft and Alexander Smith)