UPDATE 6-PNC to buy ailing National City for $5.6 billion

(Adds detail on government's role)

By Dan Wilchins and Joseph A. Giannone

NEW YORK, Oct 24 (Reuters) - PNC Financial Services Group Inc (PNC.N) agreed to buy ailing National City Corp NCC.N in a government-supported $5.6 billion deal to rescue the large Ohio lender and create the No. 5 U.S. bank by deposits.

The transaction doubles PNC's size and will provide it with a bigger branch network and a much larger base of deposits, which can provide cheap funding and increased financial stability.

The deal is the first since government officials signaled earlier this week that they would approve of banks using parts of a $250 billion U.S. Treasury Department capital infusion to acquire weaker rivals.

PNC expects some $20 billion of writedowns from National City's loans, losses that dwarf the accounting value of the entire Cleveland-based bank. National City said earlier this week the company was recently worth $17.2 billion, based on shareholder equity on its balance sheet.

"That's why you've been seeing financial institutions get pounded this year, because no one knows what their assets are worth," said Steve Persky, chief executive of Dalton Investments in Los Angeles.

National City aggressively invested in its mortgage business beginning in the 1990s, a bet that paid off earlier this decade, but turned out to be perilous as the U.S. housing market cratered.

The company sold off its First Franklin Financial Corp subprime mortgage lending business in late 2006, but held on to billions of dollars of subprime mortgages. It was also too slow in shedding other bad mortgage assets.