UPDATE 4-Tepco to hike business charges by avg 17 pct

* Tepco to raise corporate customer rates by avg 17 pct

* New blow to global competitiveness of Japan firms

* Tepco faces huge compensation costs after Fukushima crisis

* High fossil fuel prices compounding firm's woes (Adds quotes)

By Kentaro Hamada and Yoko Kubota

TOKYO, Jan 17 (Reuters) - Tokyo Electric Power Co said on Tuesday it will raise electricity rates for businesses by an average 17 percent, adding to pressure on beleaguered Japanese firms as it struggles to pay for the radiation crisis at its Fukushima plant.

Japanese firms already pay higher prices for power than competitors based in China and South Korea, and a Daiwa Institute of Research report last August estimated that a 20 percent rise in electricity rates nationwide would cut industrial output by 4.7 percent and GDP by 1.4 percent.

"If the current situation continues, our operation will worsen further and we will see an impact on fuel procurement," Tokyo Electric president Toshio Nishizawa said.

"We will continue to work on streamlining but we need to ask for a rise in this tough operational environment. We are very sorry for our customers," he told a news conference.

The higher rates target businesses including large factories, office buildings and department stores.

They will cause a fresh headache for Japanese firms struggling with hurdles that have spurred a shift in manufacturing capacity overseas in the past two decades.

These include steep corporate taxes, strict labour regulations, trade barriers, high costs of cutting carbon emissions and a strong currency that hinders exports.

"The scale of the impact will vary across industries and companies. For some it won't be big but for others, when they add up all the hurdles they face in Japan, this could be the push to shift production overseas," said Hiroyuki Fujiwara, a senior researcher at Nippon Research Institute.

The utility, known as Tepco, also said it would seek rate rises for households based on a business reconstruction plan to be submitted in March, though those must receive government approval. It did not disclose the size of the rise in household rates.

The Tepco plan, which is expected to include cost-cutting and possibly asset sales, will also form the basis for requests for fresh bank lending and injections of public funds that are expected to lead to its de facto nationalisation.

The corporate rate rise would be worth around 400 billion yen ($5.2 billion), he said.

That is only a drop in the bucket, however, as Tepco faces an estimated 4.5 trillion yen in compensation payments in the first two years alone for residents and businesses affected by the crisis at its Fukushima Daiichi plant, while the cost of decommissioning four reactors there is put at 1.2 trillion yen.

Its problems have been compounded by a higher fuel import bill, which it estimates will rise by some 700 billion yen in the year to March 2013, as it shifts to fossil fuel-fired power generation, with only two of its 17 nuclear reactors still operating.

Public worries about safety have prevented reactors from being brought back on line after they are shut for routine maintenance and the rate rises are based on the assumption that Tepco's Kashiwazaki Kariwa plant, the world's largest nuclear complex, will not restart in the financial year to March 2013.

About 60 percent of Tepco's electricity sales, or some 177 billion kilowatt-hours, are to corporate users, Tepco data shows. The rise would affect 240,000 customer contracts. ($1 = 76.71 Japanese yen) (Additonal reporting by James Topham, Osamu Tsukimori; Writing by Linda Sieg, Edmund Klamann, Yoko Kubota; Editing by Edwina Gibbs and Michael Watson)