UDPATE 2-Gazprom creates state-controlled utility champion

* Vekselberg's Renova to merge power assets with Gazprom

* Renova to get over 25 pct stake in Gazprom Energoholding

* Merged power group aims to list on foreign, domestic mkts

* Deal part-reverses privatisation of three years ago

* Russia's competition watchdog fears reduced competition

(Releads, adds background on Russia power sector, analyst quotes, InterRAO, details)

By Anastasia Lyrchikova

MOSCOW, July 7 (Reuters) - Russia's Gazprom will merge its power division with assets belonging to the oligarch Viktor Vekselberg to create a state-controlled national utility, part reversing a recent privatisation of the industry.

The deal, signed by Gazprom and Vekselberg's Renova Group on Thursday, will see Vekselberg transfer his stakes in four Russian power plants to Gazprom Energoholding in exchange for at least a 25 percent stake in the newly merged group.

"The company will be on the same level as other giant energy groups such as E.ON (EONGn.DE) and EDF ... It will have a 25 percent share in the Russian (electricity) market with a total generation capacity of 52 gigawatts," Gazprom Chief Executive Alexei Miller told reporters.

Vekselberg, Russia's 10th-richest man, with a $13 billion fortune, added that the newly merged company could eventually be restructured and floated on an overseas stockmarket.

"Our goal is to create a publicly traded company that will be traded on foreign and domestic markets," Vekselberg said.

Analysts said the merger would hamper competition in a sector already struggling under government caps on electricity prices -- aimed at pleasing voters ahead of upcoming parliamentary and presidential elections.

"Gazprom will have around 28 percent of the wholesale (power) market. This is, of course, a dominant position on the market. At the moment, this looks very bad for competition," Otkritie analyst Sergei Beiden told Reuters.

He added that Vekselberg's assets were now valued at just over half what he paid for them three years ago.

Russia's competition watchdog, the Federal Anti Monopoly Service, said it was concerned about how the merger would affect competition and consumers.

"I can say that this is not desirable. Our position has always been circumspect -- this can lead to limited competition on the market, so we will therefore watch this deal very closely," watchdog head Igor Artemyev told Interfax.

Russia broke up its state power monopoly UES three years ago, selling some electricity generators to Russian businessmen while others were bought by overseas players including Italy's Enel and Germany's E.ON.

The plan was designed to encourage investment in aging infrastructure as well as to improve business efficiency, but results varied from owner to owner.

In February 2010, Russian Prime Minister Vladimir Putin publicly chastised oligarchs including Vekselberg for failing to invest money back into their power businesses, while praising foreign owners.

Gazprom has been gradually consolidating its various power assets over the past year, including the recent merger between OGK-2 and OGK-6 .

InterRAO , a state-controlled electricity trader created at the time of privatisation, has also been buying up power assets to bring more of the industry under government control.

State-controlled Gazprom is the world's largest natural gas producer and owns four power companies that together produce 17 percent of Russia's electricity, or 36 gigawatts of power. (Additional reporting by Jessica Bachman; writing by John Bowker and Jessica Bachman; Editing by Will Waterman)