May 24 (Reuters) - Shares of PacWest Bancorp (PACW.O) fell nearly 3% on Wednesday, reversing course from premarket, as debt ceiling talks impasse overshadowed optimism around the U.S. mid-sized lender's sale of its property lending unit to bolster its balance sheet.

Investors have been on edge as the deadline to raise the government's $31.4 trillion borrowing limit looms, with President Joe Biden's administration and congressional Republicans having failed to reach an agreement so far.

PacWest on Tuesday agreed to offload its property lending unit for an undisclosed amount to real estate financing firm Roc360, a day after the sale of $2.6 billion worth of real estate construction loans at a discount.

Investors are focusing on regional lenders' exposure to the beleaguered commercial real estate market with borrowers struggling to make payments in a higher interest rate environment while asset prices have slumped.

On Wednesday, PacWest shares were trading at $7.15, while the KBW Regional Banking Index (.KRX) slipped 2%.

The stock had nearly tripled in value to close at $7.38 on Tuesday since hitting a record low on May 4 on a report that the Los Angeles-based bank was exploring strategic alternatives.

The turmoil in the regional banking space has made it an attractive target for short sellers - investors who profit from a decline in stock prices by selling borrowed shares and buying them back later at a lower price.

But analysts have signaled it would not take much good news for the sector to see a short squeeze.

Meanwhile, investors are also betting that the worst of the crisis is over and that many lenders are fundamentally sound.

So far this week, short sellers have lost a combined $98.5 million betting against shares of PacWest, Western Alliance Bancorp (WAL.N), Fifth Third Bancorp (FITB.O) and Comerica Inc (CMA.N), according to data from analytics firm Ortex.

Reporting by Medha Singh in Bengaluru; Editing by Sriraj Kalluvila

Our Standards: The Thomson Reuters Trust Principles.

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