UPDATE 2-Discover to offer $500 mln of stock, shares fall

* Discover to offer $500 million of shares

* May also issue senior notes

* Shares down 7.8 pct after hours (Adds offering details, background, byline)

By Sweta Singh

NEW YORK, July 6 (Reuters) - Discover Financial Services (DFS.N) said on Monday it will offer $500 million of common stock and use the proceeds to help repay $1.2 billion the credit card issuer received in government bailout funds.

Shares of Discover, which said it may also issue senior notes in the near future, fell 7.8 percent in extended trading after the bell.

The credit card company also reiterated that it expects net charge-offs to increase to between 8.5 percent and 9 percent in the third quarter. Discover reported charge-offs of 7.79 percent in the second quarter.

In an interview with Reuters in June, Discover Chief Executive David Nelms had said charge-offs -- the percentage of debt the company does not expect to be repaid -- could peak by the end of 2009 or 2010.

Net proceeds may partly be used to make capital contributions to the company's banking unit or repurchase preferred stock from the U.S. Treasury, the company said.