MILAN, Italy - Italian fashion house Versace is looking to sell a stake of up to 20 percent to help it fund growth in a deal that would value the group at more than 1.2 billion euros ($1.6 billion), a source with knowledge of the matter said on Wednesday.

"The stake should be around 15-20 percent and will be sold to a financial, not industrial, partner," the source told Reuters, adding the aim was to complete the deal by the end of the year.

The source, speaking on condition of anonymity, said the stake would be sold through a reserved capital increase of around 250 million euros ($331.7 million).

Versace declined to comment.

The fashion house, whose glittering gowns are worn by stars such as Lady Gaga and Madonna, hired investment banks Goldman Sachs and Intesa Sanpaolo's Banca Imi as advisers in May 2012, fuelling speculation of a sale.

Versace is seeking to strengthen its balance sheet to help fund expansion in overseas markets such as Asia ahead of a possible listing further down the road.

The company is entirely controlled by the Versace family: designer Donatella Versace has a 20 percent stake, her brother Santo has 30 percent while Donatella's daughter Allegra has the remaining 50 percent.

Last year Italian fashion brand Valentino was snapped up by Qatar's royal family in a deal that valued the company at 31.5 times 2011 core earnings. In 2012 Versace had core earnings of 44.5 million euros.

Versace Chief Executive Gian Giacomo Ferraris told reporters last week the fashion group planned to sell a minority stake privately before listing shares publicly in three to five years.

The need to expand internationally to counter the downturn in home markets has prompted firms like Versace and Prada to seek outside investors.

A second source close to the matter said the Versace family might be prepared to sell up to 30 percent, adding that a reserved capital increase was one of the options being considered.

"The capital increase is on the table. But the family might sell part of their stakes directly (to a financial partner)," the second source said.

Italian luxury groups such as Giorgio Armani, Roberto Cavalli, Missoni, and Ermenegildo Zegna have been reluctant to sell and are still controlled by their respective founding families.

The strong performance of luxury brands has made them a target for cash-rich buyers seeking recognition as well as returns.

The second source said no formal offers had been made as yet, but that there had been expressions of interest.

In August Italian newspaper Il Sole 24 Ore said a "teaser" - or data sheet about the company - had been sent at the end of July to some 10 investors potentially interested in the group.

According to several sources, Qatar Holding and FSI, an Italian investment fund owned by state lender Cassa Depositi e Prestiti, could be interested in investing in the fashion house.

Qatar Holding signed a joint venture agreement with FSI last year to invest in Italian companies in sectors including food, fashion and luxury.

($1 = 0.7518 euros)