UPDATE 1-Indonesia's Krakatau Steel seeks banks for $400 mln IPO

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HONG KONG, Aug 14 (Reuters) - Indonesia's PT Krakatau Steel has begun the process of hiring banks to handle an IPO and possible sale of a block of shares to a strategic investor that would raise $300-400 million in total, a source familiar with the matter said on Thursday.

The source, who was not authorised to speak publicly about Krakatau's plans, said top global steelmaker ArcelorMittal (ISPA.AS)(MTP.PA) had expressed interest in buying a stake.

Indonesia's largest steelmaker, with assets worth an estimated 11 trillion rupiah ($1.20 billion), Krakatau is one of 37 Indonesian state-owned firms slated for privatisation this year to help fund a widening budget deficit.

The government has decided to sell the firm's shares through an initial public offering but the plan still needs to be approved by parliament.

The government wants to keep a majority stake in Krakatau, which produced 2.25 million tonnes of steel products in 2007, meeting about 30 percent of Indonesia's total steel demand.

The government has said it is aiming to sell a maximum 40 percent stake in the firm, which supplies raw material for the making of military equipment such as tanks to state-owned military equipment producer PT Pindad in West Java.