UPDATE 1-Saudi Ittefaq Steel denies targeted by Rajhi Steel

(Updates with Ittefaq's denial)

By Souhail Karam

RIYADH, July 6 (Reuters) - Saudi-based Al-Rajhi Steel is in talks to buy a stake in a local steel firm but rival Al-Ittefaq Steel Products Co denies statements by bankers that it is a possible target.

A source at Al-Rajhi Steel, one of Saudi Arabia's three largest steel makers, said his company was looking to buy a stake in a local steel firm but he declined to elaborate. "We are working on it," he said.

A spokesman at Al-Rajhi Steel declined to comment.

Faisal Haddawi, an Al-Ittefaq's board member, denied that Al-Rajhi could buy up to 51 percent of Al-Ittefaq from a shareholder who holds 77 percent of its capital, as two bankers familiar with the two firms told Reuters earlier on Monday.

"This information is totally untrue. The structure of Al-Ittefaq Steel Products remains 77-percent owned by Helal Al-Tuwairqi. There has not been up to now any contact from any party about any negotiation to buy a stake (in Al-Ittefaq)," Haddawi told Reuters.

"We have never been approached by Al-Rajhi Steel," he added.

Al-Ittefaq Steel, the kingdom's largest private steel producer, has a production capacity of 2.3 million tonnes of steel products while Al-Rajhi Steel produces about 2 million tonnes. (Editing by Lisa Shumaker)