UPDATE 2-UBS hangs onto U.S. muni team that was set to leave

* UBS muni team stays, reverses decision to leave bank

* UBS says it plans to expand asset management arm

* Investor in 2nd bid to replace closed-end fund's board (Adds UBS comments in new paragraph 3)

By Joan Gralla

NEW YORK, June 1 (Reuters) - UBS (UBSN.VX) persuaded a U.S. municipal bond team that manages billions of dollars of assets to stay with the bank, reversing a decision made last week to join another employer, a bank spokeswoman said on Monday.

The four-member team is led by Elbridge Gerry, she said. Another team member, Kevin McIntyre, a senior portfolio manager, also decided to remain with UBS.

"They've concluded that the infrastructure and global reach of UBS asset management are something that they want to continue to take part in," the UBS spokeswoman said, adding the bank plans to grow this part of its business.

The asset management team serves wealthy individuals and institutions, including pension funds, and its departure would have further slashed UBS' muni business. In the spring of 2008, the bank shut the municipal bond underwriting unit it had inherited from Paine Webber in 2000 after failing to find a buyer.

The team's plan to join another employer, perhaps a boutique firm, led Western Investment LLC to warn that investors in a closed-end fund the bank managed risked getting trapped in what it called a "worst-case scenario -- a municipal fund managed by an investment adviser with little to no meaningful experience with municipal obligations."