UPDATE 2-Hong Kong's CKI clears competition hurdle in bid for Australia's APA Group

* CKI needs Australian foreign investment approval

* Gas supply, prices in the political frame

* APA shares climb but remain well below offer price (Adds political context)

MELBOURNE, Sept 12 (Reuters) - Hong Kong’s CK Infrastructure Holdings Ltd won approval on Wednesday from Australia’s competition watchdog for a A$12.98 billion ($9.2 billion) takeover of gas pipeline operator APA Group, but still needs clearance from the government.

The deal would make CKI - part of an empire founded by Hong Kong tycoon Li Ka-shing - the major gas pipeline player on Australia’s east coast in what would be the third biggest takeover, including debt, of an Australian company.

The Australian Competition and Consumer Commission (ACCC) said the takeover would not change market dynamics on the east coast, given that CKI was not a big competitor in that market.

In Western Australia, where CKI already owns the major gas pipeline in the state competing against APA, the competition watchdog accepted a court-enforceable undertaking from the CK Consortium to divest APA’s gas pipelines there.

The undertaking addressed the regulator’s concerns about the loss of competition in Western Australia’s gas pipeline development market, it said.

APA Group, Australia’s biggest gas pipeline company, said in a separate statement that the bid still required approvals from the Foreign Investment Review Board (FIRB), APA security holders and the Supreme Court of New South Wales.

APA shares have been trading well below the offer price of A$11.00 per stapled security amid uncertainty over whether the ACCC and FIRB would approve the deal.

With one hurdle cleared, APA’s shares rose 2.3 percent to A$9.99, but were still below the offer price as approval from the government is seen as a tougher obstacle amid political concerns about Australia’s soaring gas prices and diminishing supply.

The country’s heaviest gas users are in the southeastern states and have become increasingly dependent on gas from the northeastern state of Queensland which flows on APA’s pipelines.

Australia’s new treasurer, Josh Frydenberg, who was previously the energy minister, will have the final say on government approval.

CKI was not immediately available for comment.

$1 = 1.4051 Australian dollars Reporting by Sonali Paul; additional reporting by Chandini Monnappa in Bengaluru; editing by Richard Pullin