DUBAI - Saudi Arabia raised 7 billion riyals ($1.87 billion) through a sukuk, its third monthly sale of domestic Islamic bonds, as the government seeks to cover a large budget deficit caused by lower oil prices.

A finance ministry official estimated in May that sales of debt in the local market would cover 25 to 35 percent of the country's 2017 budget deficit, projected at 200 billion riyals.

Riyadh started issuing domestic conventional bonds in 2015 after its finances were hit by a slump in international oil prices, but it suspended them in September last year as the issuances strained liquidity in the banking system. Since then, liquidity has improved and money rates have come down.

The new sukuk, which received bids of 24 billion riyals, was split into three tranches of five, seven and 10 years.

The government issued 2.4 billion riyals of the five-year sukuk, 3.9 billion riyals of the seven-year tranche and 0.7 billion riyals of the 10-year paper, the ministry of finance said late on Monday.

In its first domestic sukuk sale in July, the government sold a total of 17 billion riyals, while last month it raised 13 billion riyals.

The latest sukuk paid yields of 2.75 percent, 3.25 percent and 3.45 percent for the five, seven and 10-year bonds, respectively, sources familiar with the matter said on Tuesday.

In its previous sukuk sale last month, Saudi Arabia paid yields of 2.7 percent, 3.2 percent and 3.5 percent to borrow, bankers said at that time.

($1 = 3.7500 riyals)

(Reporting by Celine Aswad, writing by Davide Barbuscia; Editing by Catherine Evans) ((;))