Last month, the Luxembourg government presented a bill to parliament to allow the securitisation of assets for a proposed sukuk worth 200 million euros ($275 million), part of efforts to boost the tiny state's Islamic finance credentials.

Such legislation could be passed in two to four months but lawmakers will focus on approving the 2014 budget which may shift the timetable, said Marc Hansen, a member of Luxembourg's legislature, the Chamber of Deputies.

"We are now waiting for the annual budget in March; this is now the top priority," said Hansen, who serves as president of the Chamber's finance and budget committee. "The timeline is between two to five months."

Lawmakers are now studying the bill's conformity to existing laws, while the actual structure and issuance of the sukuk depends on the finance ministry, Hansen added.

The bill identifies three real estate assets to underpin the Islamic bond.

AAA-rated Luxembourg could pip Britain's ambitions to become the first Western country to issue a sovereign sukuk. Last year, Britain unveiled plans to sell a 200 million pound ($335 million) sukuk and it has mandated HSBC to advise on the deal, giving a "2014-2015" timeframe.

Legal filings show Luxembourg's sukuk would be denominated in euros and listed on an exchange, but such details are not final, said Hansen, a member of Prime Minister Xavier Bettel's Democratic Party.

"The plan is to discuss these - in my opinion euro will be a strong choice."

Luxembourg's Stock Exchange was the first in Europe to list a sukuk in 2002; it has since listed 16 with three of them currently outstanding, said LSE secretary general Maurice Bauer.

(Editing by Andrew Torchia)

By Bernardo Vizcaino