JERUSALEM, May 21 (Reuters) - Bank Hapoalim (POLI.TA: Quote, Profile, Research), one of Israel's two largest banks, said on Wednesday it sold its entire U.S. mortgage backed securities portfolio to U.S. investment fund Pimco for $2.55 billion.

Hapoalim said in a statement the value of its MBS portfolio was $3.42 billion.

The deal was made through Deutsche Bank in a non-financed cash transation.

As a result of the sale, Hapoalim said it will record a loss of $870 million, of which $710 million had previously been reported as a decline in value last month.

The bank said it will post a loss in the first quarter but that it expects to record a profit of at least 1 billion shekels for all of 2008.

"The decision to sell the entire portfoio dispels the uncertainty regarding the MBS portfolio in the United States," Hapoalim said.

($1 = 3.38 shekels)

(Reporting by Steven Scheer; editing by Rory Channing)