* Deal to close within the next week
* Borders to use $25 mln of proceeds to reduce debt
* Borders to continue carrying Paperchase products
* Borders shares up 10.2 percent (Adds analyst note, NEW YORK to dateline; updates share movement)
DETROIT/NEW YORK, July 13 (Reuters) - Bookstore chain Borders Group Inc BGP.N said on Tuesday that it would sell a British-based retailer of stationery, cards and gifts to a private equity firm for about $31 million to lower its debt load.
Shares of Borders, the No. 2 U.S. bookstore chain by sales after Barnes & Noble Inc (BKS.N), were up 10.2 percent at $1.62 in midday New York Stock Exchange trading.
Borders said it expected the agreement to sell Paperchase Products Ltd to Primary Capital, a British private equity firm that invests in middle-market buyouts in Europe, to close within the next week.
Borders said it was required to use $25 million of the proceeds to reduce the amount outstanding under its $90 million term loan credit facility.
"The sale of our Paperchase business is another major step in strengthening our balance sheet," Borders Group President Mike Edwards said in a statement.
Standard & Poor's Equity Research analyst Michael Souers reiterated his "sell" recommendation on Borders shares despite lauding the sale of Paperchase. He wrote in a research note that he still had a negative outlook on the book retailing industry and expected e-book sales to hurt Borders' gross margins.
Borders last week launched its own e-bookstore as it seeks to catch up to rivals such as Barnes & Noble and Amazon.com Inc (AMZN.O), which have commanding leads in the e-book market. [ID:nSGE66607B]
Borders, which has faced declining sales for several quarters as more bookselling has shifted online, in May received a $25 million investment from financier Bennett LeBow, who is now the company's chief executive officer. [ID:nN03254228]
In March, Borders repaid a $42.5 million loan to Pershing Square Capital Management and secured access to $700 million in credit.
As part of Tuesday's deal, Borders said its U.S. stores would continue to carry products designed and sourced by Paperchase.
Borders purchased a majority interest in Paperchase in 2004. Almost all of its stores feature Paperchase gifts and stationery products. (Reporting by Ben Klayman in Detroit and Phil Wahba in New York; Editing by Lisa Von Ahn)