Hitachi set to buy Finmeccanica assets in European rail push

* Deal expected to top $2 billion

* Main focus is profitable rail signal system unit Ansaldo

* Loss-making train unit also bundled together in the deal (Recasts and adds details on Hitachi (Other OTC: HTHIF - news) )

By Pamela Barbaglia and Danilo Masoni

LONDON/MILAN, Feb 23 (Reuters) - Hitachi Ltd has agreed to buy Italian conglomerate Finmeccanica (LSE: 0ONG.L - news) 's rail and signal assets, sources close to the matter said, a deal expected to top $2 billion and give the Japanese firm a stronger foothold in Europe to compete with bigger rivals.

For Hitachi, which relocated its rail division to London last year, the main focus of the deal is rail signal system unit Ansaldo STS (LSE: 0NK9.L - news) , a profitable business which would help it sell combined carriage and signals packages as well as give it a manufacturing presence in continental Europe.

The transaction will also include loss-making train company AnsaldoBreda - a unit the Italian state-controlled industrial conglomerate was keen to bundle in the sale as it focuses on its core business areas of aerospace, defence and security.

Shares (Frankfurt: DI6.F - news) in Finmeccanica jumped, closing up 5.8 percent at their highest level since July 2010. Shares in Hitachi edged 0.5 percent lower in a flat broader market.

Damian Thong, an analyst at Macquarie Capital, said a key challenge for Hitachi would be avoiding labour strife as it considers how best to restructure the units.

"They'll try to keep workers conscious of the fact that they're in there for the long haul. I doubt they'll go in and do a clean sheet restructuring. That may help them reduce confrontation in labour management," he said.

A deal, which would thwart a rival offer from China's Insgima Group, would also be the latest in a string of overseas acquisitions by Japanese firms seeking to escape low growth prospects at home as the country's population rapidly ages.

"It's a symbolically meaningful deal for Hitachi. I do expect this to signal further investments in Europe," Thong added.

An agreement is poised to be signed soon after receiving the green light at a Finmeccanica board meeting on Friday, one of the sources said.

The sources declined to identified ahead of an official announcement. Spokesmen at Finmeccanica and Hitachi declined to comment.

Finmeccanica has full control of AnsaldoBreda and owns 40 percent of Milan-listed Ansaldo STS. The sale of the stake will trigger a mandatory takeover offer by Hitachi for the whole signal unit which has a market value of 1.77 billion euros ($2 billion).

It is not expected to command much of a premium due to its combined sale with AnsaldoBreda which, according to one analyst estimate, had a negative value of 150 million euros in 2014. Shares in Ansaldo STS ended slightly lower on Monday.

In rail, the Japanese conglomerate competes with Canada's Bombardier Inc (Toronto: BBD-A.TO - news) , France's Alstom SA (LSE: 0J2R.L - news) and Germany's Siemens AG (Xetra: SIEC.DE - news) .

($1 = 0.8825 euros) ($1 = 118.9000 yen) (Additional reporting by Reiji Murai, Thomas Wilson and Ritsuko Ando in Tokyo; Editing by Sophie Sassard, Susan Thomas and Edwina Gibbs)