* Rail asset sales to cut Finmeccanica debt by 15 pct
* Expected to boost investor confidence in turnaround plan
* Finmeccanica bond prices rise sharply
* Deal strengthens Hitachi foothold in Europe (Adds Finmeccanica CEO's comments throughout)
By Danilo Masoni and Valentina Za
MILAN, Feb 24 (Reuters) - Italian aerospace and defence group Finmeccanica has agreed to sell its rail business to Hitachi Ltd in a deal which will cost the Japanese conglomerate up to 1.9 billion euros ($2.2 billion) and cut Finmeccanica's debt by 15 percent.
For Hitachi the acquisition will strengthen its position in Europe, where it competes with the world's top three international train makers - Canada's Bombardier, Germany's Siemens and France's Alstom. The Japanese group had already moved its global rail division to London last year.
State-controlled Finmeccanica has been trying to sell loss-making train unit AnsaldoBreda and its controlling stake in rail-signalling company Ansaldo STS for almost four years, deeming the business to be too small to compete on its own in foreign markets.
However, corruption scandals and political meddling delayed the process, prompting ratings agencies to downgrade the Italian group's 4.1 billion euros of debt to junk status, increasing its financing costs and damaging its international competitiveness.
The Hitachi deal, which will cut Finmeccanica's debt by 600 million euros, is expected to boost investors' confidence in Chief Executive Mauro Moretti's ability to turn the company around but analysts said they do not expect an immediate upgrade to its ratings.
Moretti said at a press conference late on Tuesday earnings targets for this year would be revised higher and credit ratings would improve after the sale.
Moretti, the Italian rail industry veteran who took over at Finmeccanica eight months ago, wants to cut debt to below 3.5 billion euros by 2017, sell non-core businesses and find a partner for its U.S. defence subsidiary DRS Technologies.
"With this deal Finmeccanica becomes a pure aerospace, defence and security company," Chief Financial Officer Gian Piero Cutillo told analysts, adding that the remaining non-core businesses accounted for under 1 percent of the group's sales of 14 billion euros.
The Hitachi deal is the latest big merger in the rail sector after Siemens' 2.2 billion-euro takeover of Invensys's rail signalling arm in 2013, as the industry consolidates in the face of increasingly fierce competition.
China's CNR and rival CSR Corp plan to merge to create a $26 billion company, the world's largest trainmaker by sales thanks to its domestic market, which is now looking to export markets for its high-speed trains.
Banking sources said on Tuesday CNR might yet make a counter-offer for Ansaldo STS, attracted by Ansaldo's ERTMS technology (European Railway Traffic Management System) to help it get into European markets. Last year CNR pulled out of the bidding due to the distractions of its domestic merger, leaving Chinese IT group Insigma to bid alone.
"This is a now or never opportunity for CNR," one banker familiar with the industry said.
But Moretti and Hitachi said they did not expect there would be a bidding war for control of Ansaldo STS.
"I don't think there can be a hostile bid," Moretti said, but added if there was a counter bid "it will be discussed".
For Hitachi, the main attraction is also Ansaldo STS, as it would help it sell carriage and signals packages as well as giving it a manufacturing hub in continental Europe.
Hitachi is expected to launch its mandatory offer for Ansaldo STS in September, as the regulatory approvals process could take up to five months and involve several jurisdictions, one of the banking sources said.
"We negotiated for 40 percent and I am confident we can lift our stake to above a majority," Hitachi Rail Chief Executive Alistair Dormer said.
The company behind Japan's first "bullet" trains is already investing in a plant in northeast England in a drive to expand within Europe and beyond while its domestic market shrinks.
Ansaldo STS has long made signal systems for North America and Europe - a good fit for Hitachi given that Japanese signal systems are often incompatible with foreign railways.
"By acquiring these complementary companies it will give us a bigger global base. We hope to compete better with the so-called big three in volume and size," Hitachi's CEO Hiroaki Nakanishi told a press conference in Tokyo.
Finmeccanica's shares closed down 1 percent at 10.87 euros, having risen more than 6 percent in the previous session amidst reports of a deal, while the company's bonds were sharply higher. Ansaldo STS's shares closed up 6 percent at 9.37 euros, just below the price offered by Hitachi.
Finmeccanica has about 5 billion euros of outstanding bonds, with coupons ranging from 4.375 percent to 8 percent.
Hitachi, which was advised by Citi, will pay 773 million euros for Finmeccanica's 40 percent stake in Ansaldo STS.
The Japanese company will pay 9.65 euros for each Ansaldo STS share - a 9.2 percent premium to the stock's closing level on Monday - and launch a mandatory offer to buy out other shareholders. If all shareholders tender their shares, the overall price will rise to a little more than 1.9 billion euros.
Finmeccanica's financial advisors were Mediobanca and UBS.
Hitachi will also pay 36 million euros for AnsaldoBreda, excluding a factory in Sicily, certain residual contracts and other activities that need revamping.
$1= 0.8835 euros Additional reporting by Pamela Barbaglia in London, Thomas Wilson in Tokyo and Paolo Biondi in Rome; Editing by David Goodman, Greg Mahlich and Susan Thomas