* E.ON agrees to sell U.S. unit to PPL
* PPL buys business for $6.7 billion
* Largest U.S. power deal of 2010 (Changes to reflect confirmation, adds new details throughout)
NEW YORK/FRANKFURT, April 28 (Reuters) - Germany's E.ON (EONGn.DE), the world's largest utility by sales, agreed to sell its Kentucky-based unit to U.S. peer PPL (PPL.N) for $6.7 billion (5 billion euros) in cash, as the U.S. utility refocuses on steadier, regulated operations.
PPL will be picking up Kentucky's two largest utilities -- Louisville Gas & Electric Co and Kentucky Utilities Co -- in the deal. They serve about 1.2 million customers and operate about 7,600 megawatts of electric generation.
PPL's shares fell nearly 8 percent after reports of the deal surfaced earlier on Wednesday.
PPL Chief Executive James Miller said the deal "will immediately improve PPL's business mix by adding high-performing regulated utility operations" to its mix of regulated and unregulated operations.
Still, the deal is expected to be modestly dilutive in the first full year after the combination closes and accretive to earnings by 2013.
PPL was likely attracted to the assets because they were regulated and predictable, according to Dudack Research Group utility analyst Daniele Seitz.
The company's management has recently been stung by its unregulated operations that sell power into the open market at competitive prices, she said. The economic downturn has taken its toll on electricity prices in recent years due to weak power demand.
"They've felt really uncomfortable being thrown around by the market," Seitz said. "They were looking for something that was secure, strong and basic."
PPL said it will also assume $925 million of debt and receive tax benefits of $450 million as part of the deal. The company has has committed bridge financing for the transaction from Bank of America Merrill Lynch and Credit Suisse.
LARGEST U.S. UTILITY DEAL THIS YEAR
The sale, one of a slew of divestments by European utilities to cut debt after a takeover spree, is part of E.ON's efforts to shed more than 10 billion euros worth of assets by the end of the year.
Reports of the auction surfaced last month in Reuters and other news outlets. Sources told Reuters that PPL, U.S. utility Duke Energy (DUK.N), and a consortium involving Canadian utility Fortis (FTS.TO) were the last remaining parties bidding.
The sale is at the high end of what was expected from the sale -- analysts such as Mario Kristl from DZ Bank had estimated the division, formerly known as LG&E, to be worth as much as 5 billion euros ($6.66 billion).
The deal is also the largest in a string of recent transactions in the U.S. power sector, eclipsing Ohio's FirstEnergy Corp (FE.N) $4.4 billion all-stock takeover of Pennsylvania's Allegheny Energy Inc AYE.N.
Utility deals in the United States are drawn-out procedures which face tough scrutiny from states and regulators, which have caused several large proposed combinations to fall apart in the last decade.
The deal will require approval in Kentucky, Virginia, Tennessee, and by federal regulators. PPL expects the deal to close by the end of the year.
E.ON's divestments are meant to reduce E.ON's economic net debt, which soared to 45 billion euros by the end of 2009, from 18 billion at the end of 2006.
Because E.ON is still 4 billion euros shy of its divestment target, selling the business would be a major step to execute its strategy.
E.ON had to cancel the sale of its Italian gas grid earlier this month.
E.ON also operates U.S. wind farms as part of its renewables business and not the E.ON U.S. unit.
Goldman Sachs advised E.ON on the sale. Bank of America and Credit Suisse advised PPL.
PPL shares fell $2.13, or 7.7 percent, to $25.60 on the New York Stock Exchange after reports of the deal surfaced on Wednesday.
E.ON shares rose in a falling market. The stock was up 1.1 percent at 28.06 euros at 1504 GMT, while the Stoxx utilities index dropped 0.8 percent. ($1=.7508 euros) (Writing by Peter Dinkloh; Editing by Mike Nesbit and Marguerita Choy)