Italy's Ilva steel plant set to attract two bids as PM woos investors-sources

* ArcelorMittal (Other OTC: AMSYF - news) , JSW carried out due diligence

* Italy wants to reach agreement by Christmas

* ArcelorMittal could pay 500 mln euros-JP Morgan

By Silvia Antonioli and Massimiliano Di Giorgio

LONDON/ROME, Oct 3 (Reuters) - Italy's troubled Ilva steel plant could attract bids from two foreign groups within days, industry sources said on Friday, holding out a lifeline to the lossmaking plant whose future is in doubt following an environmental scandal in 2012.

Privately-owned Ilva, Europe's biggest steel plant by output capacity, was placed under special administration last year after being accused of failing to contain toxic emissions, threatening the jobs of its over 16,000 employees.

The company, which supplies key raw materials to the automotive and manufacturing sectors, is losing tens of millions of euros every month, posing a headache for the government of Prime Minister Matteo Renzi which is on a mission to attract foreign investors to save domestic industries.

The government hopes a deal will be achieved by Christmas for the company, whose main plant is in Taranto, southern Italy, an area of high unemployment.

The two parties expected to make initial offers for the plant are Indian steelmaker JSW, and a joint venture led by Luxemburg-based ArcelorMittal, the world's largest steel producer, together with Italian steel processor Marcegaglia, said two sources close to the situation.

"Formally, there hasn't been an offer yet, but I believe it's a matter of days," a first source close to Ilva said. "ArcelorMittal with Marcegaglia and JSW are the only two formal expressions of interest. Both sides have visited the plants and now they are doing some work in the dataroom."

ArcelorMittal, formed in 2006 when India's Mittal Steel took over western European producer Arcelor, has sent about 60 people to visit Ilva for about a month to complete due diligence, while JSW has sent four high-level executives for a few days, the sources said.

ArcelorMittal made no comment beyond a statement of a week ago that it was interested in a potential purchase and was working with Marcegaglia to evaluate the opportunity.

JSW was not immediately available for comment.

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The Italian steel sector is Europe's second-largest after Germany's but is deeply troubled, with its two biggest plants -Ilva and Lucchini - under special administration and looking for buyers, while a third, Acciai Speciali Terni, faces a major restructuring and a potential future sale.

While Italy is battling to escape from its third recession in six years, Renzi has said he wants to save the steel industry by opening doors to foreign investors.

"If many companies are in the hands of foreign investors, that is a positive signal. Italy is open to foreign investors," Renzi said on Thursday at meeting with investors in London.

Estimating how much Ilva could be sold for is difficult given its situation. The company is burdened by net debt of roughly 2 billion euros ($2.5 billion) and a needs 1.8 billion euros to be invested for it to comply with environmental law.

But is not clear who would have to pay for that.

JP Morgan analyst Alessandro Abate estimated ArcelorMittal could spend about $500 million for a 70 percent stake in the company, while Indian newspaper reports said JSW's offer could be in the range of $400 million to $500 million.

"The ArcelorMittal-Marcegaglia team is the only serious alternative to the current ownership structure ... as it would offer more credible guarantees ... for employment and (the) company's turnaround," Abate said in a note.

The government said last month that besides ArcelorMittal and its partner Marcegaglia, Ilva's biggest client, at least four other unnamed firms were considering buying the plant.

Ilva has also been hit by weak demand for steel in Europe since the 2008 financial crisis. Its main production site has a capacity of more than 11 million tonnes of steel but in 2013 produced only 5.7 million. (1 US dollar = 0.7925 euro) (Additional reporting by Aman Shah, Philip Blenkinsop and Maytaal Angel; Editing by David Holmes)