UPDATE 3-Tepco may split off older fossil-fuel ops -sources

* Steps part of a business reconstruction plan

* Yokosuka, Ohi, Goi plants seen likely to be hived off

* Tepco's whole fossil-fuel division may be split off -Nikkei

* Nikkei report too far-reaching - govt source (Recasts with information from sources)

By Kentaro Hamada and Yoko Kubota

TOKYO, Jan 23 (Reuters) - Troubled Tokyo Electric Power Co (Tepco) is looking at hiving off some of its older fossil fuel-fired power plants, seeking to either sell them or set up special-purpose companies for each plant that would invite outside investment, two sources familiar with matter said.

Tepco, which is now widely expected to be effectively nationalised, needs to cut costs as it grapples with a massive cleanup and compensation bill after the nuclear crisis at its Fukushima plant as well as a jump in fuel costs as reactors remain closed amid public safety fears.

The steps are set to be part of a business reconstruction plan that Tepco aims to submit to the government in March, the sources said, declining to be identified as they are not authorised to speak publicly on the matter.

Although the utility has yet to finalise the plants it is willing to part with, its 2,270 megawatt Yokosuka plant, 1,880 MW Goi plant, 1,150 MW Minami Yokohama plant and 1,050 MW Ohi plant are expected to be included and others may also be considered, they said.

Most of these plants were built between 1965-1974 or earlier and need to be upgraded.

The steps outlined by the sources who spoke to Reuters are less far-reaching than a Nikkei newspaper report which said Tepco's entire fossil fuel-fired plant division, whose assets are valued at around 900 billion yen ($11.7 billion), could be split off from its nuclear power and other businesses.

The fossil fuel division accounts for some 60 percent of Tepco's power generation capacity.

The Nikkei also said that Asia's biggest utility may separate its nuclear and hydro power generation, electricity transmission and power sales into three in-house firms to increase transparency in their operations.

But a government source said that while Tepco would naturally try to offload some older fossil fuel plants if it could, selling other plants could strip it of its ability to pay compensation claims. "If Tepco was to sell everything, it wouldn't be able to fulfil its compensation duties. It's going to be a matter of balance," said the government source who declined to be identified.

"Getting rid of older plants will make it a leaner company but ... in terms of increasing transparency and reforming management, breaking it up into pieces is rather meaningless."

In response to the newspaper report, Tepco said no decisions have been made.

"We have not decided on a separating out of or a sale of our fossil-fuel power division. Nor have we decided to split the company into separate in-house firms," the utility said in a statement.

To keep Tepco afloat, the government is considering injecting about 1 trillion yen in public money while trying to secure loans of about the same amount from lenders.

Kyodo news agency reported on Saturday that the firm would in effect be nationalised for at least 10 years following the public money injection and is expected to become profitable in its 2013 business year.

To emerge from de facto nationalisation as early as March 2022, Tepco will be expected to pay back the financial assistance it has received from the fund, using half of its pretax profit earned every year, Kyodo added.

Shares in the company fell 1.8 percent to 213 yen on Monday while the broader market was flat. ($1 = 77.1200 Japanese yen) (Additional reporting by Osamu Tsukimori, Junko Fujita; Writing by Edwina Gibbs)