UPDATE 3-Czech firm EPH to buy Vattenfall's German lignite coal operations -sources

* Government waiting for Vattenfall’s proposal

* Deal expected to be signed next week -source

* Macquarie, Czech Coal have dropped out -sources

* Vattenfall’s emission to be cut by two-thirds (Adds Czech Coal declined to comment)

By Jan Lopatka and Arno Schuetze

PRAGUE/FRANKFURT, April 8 (Reuters) - Sweden’s Vattenfall has agreed in principle to sell its loss-making lignite coal mines and associated power plants in Germany to Czech investor EPH after two rival bidders dropped out, three people familiar with the matter said on Friday.

The deal is expected to be signed next week, one of the sources said. State-owned Vattenfall’s supervisory board is expected to give final approval in about 10 days, two other people said.

EPH has agreed to pay a positive purchase price, a source familiar with the offer said, despite lignite plants making losses at current power prices and the prospect of future decommissioning. Other bidders had demanded cash from Vattenfall to cover the expected decommissioning costs.

Germany’s Steag with Australian investment fund Macquarie , and Czech miner Vrsanska Uhelna, part of Czech Coal group, had dropped out of the bidding, the people said.

EPH, which teamed up with Czech private equity group PPF Investments, declined to comment, as did Vattenfall, Macquarie and Czech Coal.

Sweden’s government has not yet received a proposal from Vattenfall on the sale, but it has started preparations to evaluate the deal if one is tabled, the Enterprise Minister Mikael Damberg told Reuters.

Vattenfall, which is selling the assets as part of a strategy to reduce its carbon exposure, will see its carbon emissions fall by two-thirds to around 24 million tonnes per year after the sale, making it a utility with one of the smallest carbon footprints in Europe.

EPH already owns two German lignite power plants and lignite miner Mibrag.

If the sale is successful EPH will buy Vattenfall’s three lignite power plants and five open-cast mines in the Lausitz region in eastern Germany, and its partly owned Lippendorf plant near the city of Leipzig.

The deal could still be complicated by German mining authorities, which could require EPH to deposit some of the decommissioning provisions of about 1.5 billion euros in cash, a source familiar with the sales process said.

The power plants have about 8,000 MW capacity, or nearly half of Vattenfall’s fossil power fleet capacity, which includes gas and hard coal power plants in Germany and the Netherlands.

Vattenfall took an impairment of 15.2 billion crowns ($1.86 billion) on its lignite assets in 2015 due to falling power prices and the German government’s measures to cut carbon emissions.

German power prices have fallen by around 40 percent since Vattenfall launched the sale in 2014. ($1 = 8.1756 Swedish crowns) (Additional reporting by Christoph Steitz in Frankfurt, Nerijus Adomaitis in Oslo and Sven Nordenstam and Johan Sennero in Stockholm; Editing by Maria Sheahan and Susan Thomas)