* Treasurer says flag carrier bound by "regulatory handcuffs"
* Either majority foreign ownership, or more govt support
* Qantas says majority foreign-owned Virgin has unfair advantage
* Law change could make Qantas a takeover target (Adds quotes)
By Jane Wardell and Jackie Range
SYDNEY, Nov 28 The Australian government has flagged allowing majority foreign ownership or increased government support for Qantas Airways Ltd, a move that could shake up the regional aviation sector and make the national carrier a takeover target.
Australian Treasurer Joe Hockey on Thursday sparked speculation about Qantas' future by calling for a debate on the Qantas Sale Act, the law that caps foreign ownership of the airline at 49 percent.
Hockey, acknowledging that Qantas is in "regulatory handcuffs", hinted that he would lean toward lifting foreign ownership restrictions, warning taxpayers would pay the price for keeping Qantas an Australian-backed airline through government support.
Any change to the law, brought in two decades ago when Qantas was privatised, could make the airline a takeover target, and give it a leg-up in a competitive regional aviation market.
Hockey's comments come amid a bitter battle between Qantas and its domestic rival, Virgin Australia Holdings Ltd which is majority owned by Gulf carrier Etihad, Singapore Airlines, Air New Zealand.
Qantas has complained to the government about Virgin Australia's move to tap its foreign shareholders for A$350 million ($330 million) in new capital to bolster its balance sheet.
Qantas chief executive Alan Joyce made his preference for government assistance clear in a letter to employees on Thursday.
"Australia needs its national carrier," Joyce said. "A strong aviation capability is a national asset, important for our national security and our global identity."
Prime Minister Tony Abbott refused to take sides, stating only that "Qantas should remain an Australian icon".
"I'm happy to look at a range of measures that will help ensure that happens but certainly at this point in time I'm not being prescriptive about any particular change," he told reporters.
The potential change in the status quo for Qantas, which earlier this year formed an alliance with Dubai-based Emirates Airlines, pushed its shares 3.8 percent higher to A$1.23.
The Qantas Sale Act also requires that the airline's operational base and headquarters are in Australia and the name Qantas is preserved. At least two-thirds of the board and its chairman must be Australians.
Analysts pointed that the debate is at an early stage and it was unclear what moves the government would favour.
Qantas claims the competition at home is unfair - while Virgin Australia has access to unlimited funds from predatory airlines backed by foreign governments, Qantas faces a double whammy of limited access to foreign funds and no financial support from the Australian government.
A revised foreign ownership cap could also make the "Red Kangaroo" a takeover target. While Australia has a small population by global standards, its relative wealth, far-flung cities and lack of high-speed rail make its aviation market very attractive.
"There may be interest from the likes of foreign airlines that do share a relationship with Qantas currently and that includes obviously Emirates and ... some of the Chinese carriers with probably some emphasis on China Eastern," said Tony Webber, an associate professor at the University of Sydney Business School.
Analysts said lifting foreign ownership restrictions or giving the airline more financial support via subsidies and tax concessions could also make Qantas a more powerful player in the region.
Allowing more foreign ownership would let Qantas emulate Virgin, first by tapping foreign investors with deep pockets and also potentially splitting the airline into more manageable domestic and international operations.
"It will allow for some of the more profitable international airlines which have probably got low cost of debt funded by their governments to then take a stake in Qantas and help Qantas remove some of the overlapping costs and so forth and share more of the flights," said Akshay Chopra, an analyst at Karara Capital in Melbourne.
(Editing by Jeremy Laurence)