UPDATE 2-Finland's Fortum closer to $6.5 bln grids sale-sources

* State-controlled firm hires Citi, Danske Bank - sources

* Government has not decided to sell, but likely to - source

* Deal would be biggest in Nordic region for five years

* Private equity, infrastructure firms seen likely bidders

By Sophie Sassard and Jussi Rosendahl

LONDON/HELSINKI, March 12 (Reuters) - State-controlled Finnish utility Fortum has hired banks to explore the sale of its power grids for an estimated 5 billion euros ($6.5 billion) in what would be the biggest Nordic deal for five years, four people familiar with the matter said.

Fortum has mandated Citigroup and Danske Bank to explore a sale that would follow the trend of large energy firms selling regulated networks in order to cut debt and focus on power generation, the people said.

"The government has yet to decide, but a sale is the most likely outcome," added one of the sources, who declined to be named because he was not authorised to talk to the media.

Fortum said earlier this year it was assessing strategic options including the divestment of its electricity distribution business and would make a decision in 2013. Alternatives would be to sell Fortum's Finnish and Swedish power grids separately or spin them off to domestic shareholders, the people said.

Fortum, Citi, Danske and the Finnish government declined to comment.

The power distribution business could fetch about 5 billion euros, based on a multiple of 10-12 times its earnings before interest, tax, depreciation and amortisation (EBITDA) of 466 million euros for the year ended September 2012, the people said. That would be broadly in line with similar assets.

Possible bidders could include private equity firm EQT , as well as 3i Infrastructure and Goldman Sachs Infrastructure who co-own the Finnish distribution network of Swedish rival Vattenfall, they added.

Finnish government officials have said previously they would prefer not to sell Fortum's domestic power grid - the country's largest - to a foreign buyer and that Finnish investors would be interested in a deal.

Finnish Pension Fund Ilmarinen also took part in the consortium that bought Vattenfall's Finnish distribution network in 2011.

"The list of bidders is likely to be long", said one banker.

However, strong competition could drive up the price and ultimately deter some from participating, others added.

"It is interesting to see on what conditions the financing will be arranged in this market," said Markku Jarvinen, equity analyst at Evli brokerage. "This is a business of stable returns, so more debt would improve the return on equity."

The Goldman Sachs and 3i consortium financed the deal for Vattenfall's Finnish distribution network with around 70-75 percent of debt.

The sale of Fortum's electricity distribution networks would be the largest transaction in the Nordic region since Pernod's 5.6 billion-euro acquisition of Vin & Sprit AB in 2008 and could bolster deal activity in the region after a 27 percent fall last year, according to Thomson Reuters data.

Fortum, which is just over 50 percent owned by the state, was involved in Finland's biggest deal of the past decade, according to Thomson Reuters data, when it spun off wholesale petroleum unit Neste Oil to shareholders in 2005.

At 1520 GMT, Fortum shares were up 1.1 percent at 15.14 euros.