UPDATE 3-Walmart wins key approval for second Chicago store

* Approval could pave way for several dozen Chicago stores

* Workers to be paid above state minimum hourly wage

* Labor group backs new stores, won't demand unionization

* Walmart shares down 1.5 pct in generally lower market

(Adds Walmart comments, details)

By Kyle Peterson and Emily Stephenson

CHICAGO, June 24 (Reuters) - A Chicago City Council committee approved plans on Thursday for Wal-Mart Stores Inc (WMT.N) to build a second store in the city, a step forward for the retailer's strategy of expanding in U.S. urban areas to find new customers.

The approval came after the retailer satisfied a key union group's concerns about wages for workers.

The plan, which could pave the way for even more stores in Chicago, is set to go to the full City Council on Wednesday for approval.

Under the agreement, announced by the Chicago Federation of Labor, workers at the new stores would be paid 50 cents above Illinois's minimum wage -- or $8.75 an an hour -- in the first year the store is open and would be able to receive raises of 40 cents to 60 cents an hour the following year.

A spokesman for the world's largest retailer said the raise was similar to what workers at other Walmart stores were eligible to receive after their first year and stressed that the company did not cut a deal with union leaders.

"The only deals that were made through this entire process were with the residents of the South Side of Chicago," Walmart spokesman Steven Restivo said.

The union's approval cleared a path for the City Council's zoning committee to approve plans for a new Walmart in Chicago's South Side Pullman neighborhood. Several alderman said during the committee meeting that they expected more stores to be built soon.

Walmart said on Monday its goal was to build several dozen stores in the city.

Other than one store built on Chicago's West Side in 2006, Walmart has not been able to win approval for other stores through the council's zoning committee, let alone through a full council vote.

"We are going to be in favor of the Pullman Walmart," Dennis Gannon, president of the Chicago Federation of Labor, told a cheering crowd on the second floor of Chicago's City Hall, where more than a hundred Walmart supporters chanted and carried signs saying "Walmart is better than welfare" and "It's about jobs."

Gannon said the union met Walmart multiple times since May 3 with the goal of guaranteeing workers wages of $1 more than the current minimum wage.

He said the union had not demanded that Walmart allow workers to unionize, but it did insist on "respect for the workers."

During the zoning committee hearing, Ald. Eugene Schulter asked questions about small vendors being accommodated at Walmart.

"A broad warning: We are going to be keeping an eye on Walmart," Schulter said. "The horror stories that I've heard throughout this country are not good ones."

Walmart shares were down 78 cents at $50.03 at the close on the New York Stock Exchange. (Writing by Brad Dorfman; editing by Steve Orlofsky and Andre Grenon)