The world's seventh-largest bank, which helped BOC list its Hong Kong arm in 2001, said on Thursday it was in talks with the Chinese bank.
"It is envisaged that such a partnership would include commercial co-operation in certain areas of investment banking yet to be agreed, and the possibility that UBS could invest approximately $500 million to become a strategic investor in BOC," it said.
"The talks continue and further details are confidential," UBS said. BOC in Beijing declined to comment.
The news comes on the heels of Friday's deal by Bank of America (BAC), which agreed to invest $3 billion for some 9 percent of the China Construction Bank (search), which is launching a public offering later this year.
One effect of the deal would help UBS' position as a bookrunner on the state-run bank's plans for a multi-billion dollar listing, expected by the end of this year or the start of next, which could yield underwriting fees of about $140 million.
But UBS might only play second fiddle in the IPO as Royal Bank of Scotland (search) has also been reported to be in talks with Bank of China on an investment worth more than $1 billion.
Analysts said UBS's investment was to the lower end of their expectations, reflecting the bank's cautious attitude on China, where it sees huge growth chances but also major risks.
"The statement isn't very aggressive. It reflects they will not overpay any investment. They're balancing cautiously, they're taking a strategic investment and that's it," said Regina Anhorn, banking analyst at brokerage LODH.
UBS shares, which have gained 4 percent so far this year, were up 0.65 percent by 0830 GMT, broadly in line with the Dow Jones Stoxx banking sector index.
UBS aims to increase its Asian business to some 15 percent of overall revenues in the next five years, from some 10 percent now, and has said it is "extremely interested" in establishing joint ventures in China with local market players.
The bank is not interested in any large-scale acquisitions in any of the regions where it is present and says it wants to stick with its policy of seeking small bolt-on acquisitions wherever they fit, as long as the price is right.
Beijing has courted foreign investors for its troubled banking sector as a means of gaining global expertise and much-needed capital ahead of global stock listings.
The sector is weighed down by bad loans in excess of $650 billion -- roughly 50 percent of the country's Gross Domestic Product -- according to estimates by rating agencies and others.
Foreign banks such as UBS, Citigroup Inc. (C), Deutsche Bank and J.P. Morgan (JPM) have been interested in making large Chinese investments, but the country's risk management controls are considered weak.
Bank of China has said it is monitoring market conditions to determine when to go public. Some of its officials have said listing this year would be difficult and the bank would not go forward with an IPO until it lands strategic investors.