* Petrobras has said for months that price rise needed
* Would boost margins for Petrobras, ethanol producers
* Gov't official says no decision yet, no deadline for one
BRASILIA, Jan 15 (Reuters) - Brazil could announce as soon as next week a 7 percent rise in gasoline prices and a 4 to 5 percent increase in diesel, daily newspaper O Estado de S. Paulo reported on Tuesday.
The move would boost profit margins on fuel sales for state-run oil producer and distributor Petrobras, which has a huge distribution network through its 'BR' service stations, and which has clamored recently for pump prices to increase.
Though Brazilian officials in recent weeks have said a price increase is forthcoming, a senior government source on Tuesday told Reuters that a final decision has not yet been taken, and that no timetable for a decision exists.
"The hammer hasn't come down on this one yet," the source said. He added that the first news of any increase would have to come via Petrobras because of its obligations to inform shareholders of information significant to its operations.
Petrobras Chief Executive Maria das Graças Foster has spoken repeatedly of the need to raise pump prices in recent months as the company embarks on a $235-billion, five-year investment plan to crank up oil output and expand domestic refining capacity.
At the government's urging, Petrobras has held pump prices largely steady for about a decade to control inflation. It is currently selling fuel at a loss due to higher international prices for crude oil.
While rich in crude oil, Brazil still imports significant volumes of refined fuel due to inadequate domestic refining capacity. Gasoline imports by Petrobras surged 56 percent in December.
The Estado newspaper article did not cite sources, and press representatives for Petrobras and Brazil's energy and finance ministries declined to comment. Finance Minister Guido Mantega told reporters in mid-December that fuel prices were certain to rise at some point in 2013.
Preferred shares in Petrobras on Sao Paulo's BMF&Bovespa stock exchange were hovering around the unchanged mark by 1430 (1630 GMT).
Estado said the government could also restore the ethanol mix in gasoline to 25 percent from a mandatory 20 percent at present. Brazil's oil regulator said in October that the ethanol blend would be raised to 25 percent by the end of June.
That would help dampen some of the inflation impact of a fuel price hike as ethanol becomes cheaper after April with increased supply. It would also allow Petrobras to improve its bottom line by lessening the need to import gasoline.
Estado said the government was trying to find a way to offset the inflationary impact of a rise in fuel prices, which is one of its biggest misgivings over any increase.
Brazil's consumer inflation rate closed 2012 near the ceiling of the government's target range despite an economy that was barely growing, suggesting price pressure will get even more intense if activity picks up as expected this year.
The government was considering cutting taxes known as PIS and Cofins within the sector to prevent the full price increase being passed on to the consumer, the article said.
Brazil has a huge sugarcane ethanol sector and it has been increasingly vocal in its calls for gasoline prices to be raised to enable ethanol prices to follow and relieve cash-strapped mills whose margins have been squeezed by rising costs.
Despite ambitious plans to climb the ranks of the world's oil producers in the coming years, Brazil is also a pioneer in biofuel with millions of flex-fuel cars on its roads able to burn either gasoline or ethanol or any mix of both.
Consumers switch at will from one fuel to the other depending on which offers better value when they fill up.