By Tova Cohen

TEL AVIV (Reuters) - A Tel Aviv court set a late August deadline on Sunday for indebted Israeli conglomerate IDB Holding to sell its stake in an insurance firm, giving its chairman some breathing space in a bitter ownership battle.

Many of the companies IDB owns have been hit by slowing economic growth and increased competition. IDB Holding owes bondholders 2 billion shekels ($550 million) and its unit IDB Development owes a further 5.8 billion shekels.

Both sets of bondholders - mainly institutional investors led by U.S. hedge fund York Capital - proposed a debt restructuring last month that would oust IDB Holding Chairman Nochi Dankner and give them full control of a combined company.

Dankner has sought a dismissal of the plan, maintaining that IDB will meet future obligations.

IDB Development, which has been trying to sell assets to pay its debt, has said it received an offer from a foreign fund for the 55 percent stake it owns in Clal Insurance , one of Israel's biggest insurers, that reflects a valuation for the entire firm of 4.5 billion shekels.

The Tel Aviv district court said Danker would have until August 22 to complete the transaction.

"This sale must be done soon ... otherwise IDB Development will not be able to meet its payments for the coming year," Judge Eitan Orenstin said.

The judge also instructed IDB Development to deposit into a trust account 800 million shekels needed to meet its debt payments through the end of August.

Following the hearing, Dankner told reporters the deadline for the Clal sale was "short and challenging" but he would seek to meet it.

IDB said in May the fund was conducting due diligence on the transaction, which should take six weeks.

To shore up IDB's capital, Dankner has brought in Argentinian businessman Eduardo Elsztain, who pledged to invest $75 million in IDB Holding, in addition to $25 million he already invested. Over the weekend, IDB filed a petition stating that Elsztain signed an agreement to deposit the money for the investment in escrow.

As well as Clal, IDB controls Cellcom , Israel's leading mobile phone operator, and supermarket chain Super-Sol . Its subsidiary Koor Industries owns a 2.4 percent stake in Credit Suisse .

($1 = 3.61 shekels)

(Reporting by Tova Cohen; Editing by John Stonestreet)

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