UPDATE 1-Iraqi PM sacks electricity minister for deals-source
* Iraq orders electricity minister out - source
* Government cancels two contracts, reviews Korean deal (Adds reaction from electricity official)
BAGHDAD, Aug 7 (Reuters) - Iraqi Prime Minister Nuri al-Maliki has dismissed his electricity minister after the government said an investigation had uncovered irregularities in power contracts with two foreign companies, a source in Maliki's office said on Sunday.
The electricity ministry also said it had asked the cabinet to rule on a $2.76 billion power plant construction contract with a unit of South Korea's STX Group after saying the company risked missing a deadline to meet one of its contract terms.
The dismissal of Electricity Minister Raad Shallal, which under Iraqi law parliament has to approve, could complicate urgent government efforts to bring in investors to tackle chronic electricity shortages that infuriate Iraqis looking to rebuild their economy after years of war and sanctions.
"The prime minister has ordered his resignation and now the parliament should vote on it," the source in Maliki's office said.
A government ombudsman said on Saturday that Iraq had cancelled power plant contracts worth $1.7 billion with a Canadian and a German company after finding "manipulation and misleading information" about their finances or their ability to carry out the work.
"The electricity ministry ordered these contracts cancelled immediately. There was no financial loss because payments were over the long term," said the statement from the office of the inspector general, an ombudsman that oversees the ministry.
"Our investigation... discovered manipulated and misleading information in the documents that the two companies delivered about their legal and financial status and their technical capabilities," it said.
But a senior official in the electricity ministry defended the contracts as valid and said the companies had agreed to build with favourable conditions for Iraq, given that security worries kept some larger companies away for now.
"These contracts are well organised and have no risk to the Iraqi side... they are with staggered payments, the first is 45 percent after a year of the start of operating and 50 percent after two years," said the official who asked not to be named.
One of the contracts was with Canadian company CAPGENT to build 10 power stations and the other with a German company called MBH, said Musab al-Mudarres, a ministry spokesman.
A call to CAPGENT in Canada did not get through. MBH did not immediately respond to emails and telephone calls.
Dismissing the electricity minister could have a political fallout. Shallal belongs to the Sunni-backed Iraqiya faction which accuses Maliki of not living up to a power-sharing deal among Shi'ite, Sunni and Kurdish political blocs.
Investment in Iraq is growing as violence ebbs eight years after the U.S.-led invasion that toppled Saddam Hussein. But corruption, inefficiency and red tape from a still highly centralised state bureaucracy are often criticised by investors.
In May, STX Heavy Industries, part of South Korea's STX Group, signed a deal to build 25 power stations with a total capacity of 2,500 MW across Iraq, including Baghdad and Basra.
Electricity ministry spokesman Musab al-Mudarres said the South Korean company was running short of time to find a third party financial guarantor, a condition of its contract.
"We have put the contract before the cabinet and it will take a final decision regarding the contract, whether to cancel it or not," Mudarres said.
Mudarres said contracts with international companies allowed them three months to finalise all required documents, including finding a third-party guarantor. "Nothing has been officially confirmed yet," said an STX Group spokesman, without elaborating.
Iraq's war-battered national grid supplies less than half of the OPEC member's 15,000 MW peak demand during the summer when temperatures can exceed 50 degrees Celsius.
As a result, Iraqis receive only a few hours of power a day from the national grid and are forced to rely on private generators in their neighbourhoods and homes. The shortages were a major complaint at nationwide protests earlier this year. (Additional reporting by Ju-min Park in Seoul and Aseel Kami in Baghdad; Writing by Patrick Markey; Editing by David Stamp)