WARSAW (Reuters) - Deutsche Bank AG <DBKGn.DE> is seeking to sell its Polish banking business, two banking sources said, part of efforts by the German bank to shed non-core assets and free up capital to meet tougher bank rules.

Germany's biggest bank is looking to sell off a string of its smaller overseas operations to try to boost capital and to simplify its business as part of chief executive John Cryan's overhaul of the group.

A sale of Deutsche Bank Polska would also mark another exit by a foreign banking group from Poland, where the government wants to increase local ownership of the country's banks.

A senior bank source said Deutsche Bank Polska was up for sale and another source familiar with the matter confirmed this.

Deutsche Bank declined to comment.

Deutsche Bank Polska, with assets of 38 billion zlotys ($9.69 billion) is Poland's eleventh biggest lender in terms of balance sheet size. Its profits fell last year partly because Polish banks had to cope with record low interest rates and make payments into a guarantee fund.

Both sources also said that Deutsche might have problems with finding a buyer as roughly a third of Deutsche Bank Polska's assets are in foreign-currency loans - mainly euro and Swiss franc-denominated mortgages. The Polish regulator is unlikely to allow the sale of these mortgages.

"The main question is who will be ready to buy it, as if you deprive it of its Swiss franc-denominated mortgages portfolio, not much remains," the senior bank source said.

The Polish financial regulator has so far demanded that foreign investors seeking to exit Poland have to keep hold of portfolios of foreign exchange-denominated mortgages to reduce risks to the Polish financial sector.

Deutsche Bank Polska's foreign currency loans portfolio stood at 12.6 billion zlotys ($3.21 billion), mainly in Swiss francs and euros.

Other foreign players in Poland's banking industry are also looking to sell. GE Money <GE.N> agreed earlier this year to sell its Polish banking business to local lender Alior <ALRR.WA>.

Austria's Raiffeisen <RBIV.VI> and UniCredit <CRDI.MI> are also in the process of selling their Polish arms with state-controlled entities likely to become buyers.

Poland's ruling eurosceptic Law and Justice (PiS) party wants to curb what it sees as excessive foreign ownership in the banking sector, currently at more than 50 percent, and, at the same time get more control over the economy.

Currently, the state-run insurer PZU <PZU>WA> and fund PFR are in talks with UniCredit <CRDI.MI> to buy Poland's second biggest lender Bank Pekao <PEO.WA>, one of the country's strongest banks with only a small portfolio of foreign-currency mortgages.

(Reporting by Marcin Goclowski; Additional reporting in FRANKFURT by Arno Schuetze. Editing by Jane Merriman)