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UPDATE 2-Moscow to challenge EU sanctions on NSD, calls for issue of 'replacement' notes

* This content was produced in Russia, where the law restricts coverage of Russian military operations in Ukraine (Adds details, background)

MOSCOW, July 1 (Reuters) - Moscow Exchange, Russia's largest bourse, on Friday said it planned a legal challenge against European Union sanctions on the National Settlement Depository (NSD) and would seek to protect the interests of Russian investors.

The NSD, Russia's domestic paying agent, equivalent to the Euroclear and Clearstream clearing houses, plays an important role in the country's financial system and is a key intermediary with international markets.

The EU imposed sanctions on it in early June.

Financial market entities, including major Russian banks, brokers and asset managers, agreed on Friday with Moscow Exchange and the NSD to establish a club that would work together to protect investors' rights, especially unqualified market participants.

"There are plans to challenge the European Union's decision on including the NSD on sanctions lists," Moscow Exchange said in a statement.

The EU sanctions on the NSD, as well as other Western measures aimed at restricting Russia's access to global financial infrastructure, have blocked many investors' access to securities held in jurisdictions outside Russia.

They have also played a part in driving Russia into its first major international debt default in over a century, something Moscow has blamed on the West and labelled a "farce".

"Foreign infrastructure has been frozen and stopped performing its function," Sergei Shvetsov, head of Moscow Exchange's advisory board, said this week.

He has called for Russian Eurobond issuers, the finance ministry included, to issue securities to replace the ones stuck abroad, saying that sanctions that make it impossible to move money from issuers to investors are a "trap of legal uncertainty".

This week, Russia's lower house of parliament approved legislation that would introduce a procedure for the mandatory conversion of foreign securities issued by Russian investors abroad into Russian shares and Eurobonds.

The law, yet to be signed by President Vladimir Putin, calls for the compulsory transfer of accounting rights from foreign to Russian organisations should the investor demand it.

The law should allow unqualified retail investors to sell their holdings to the ones more "eager for risk", Vladimir Chistuykhin, the central bank's deputy governor, said this week. (Reporting by Reuters; editing by Jason Neely and Andrew Heavens)