UPDATE 2-Putin vows to privatise, defers Sechin's electric dreams

* State holding proposed as vehicle for state utility investment

* Decision deferred as clash over privatisation continues

* Deferral a setback for Putin ally Sechin

* Disagreement focused on state hydro power generator-sources (Recasts to reflect deferral of Sechin-backed proposal, adds Dvorkovich, Sechin comments)

By Alexei Anishchuk and Anastasia Lyrchikova

MOSCOW, July 10 (Reuters) - Russian President Vladimir Putin spurned the ambitions of close ally Igor Sechin on Tuesday, deferring a proposal to make energy holding company Rosneftegaz the state's vehicle for investment in government-owned utility companies.

Sechin has clashed behind the scenes over control of state energy assets with backers of an extensive privatisation programme in the new government of Prime Minister Dmitry Medvedev, who swapped places with Putin after a March presidential election.

Medvedev has committed to a string of privatisation sales in the name of expanded private ownership and increased efficiency in the Russian economy.

Sechin allies say privately the plans smack of the massive sell-off under Russia's first president, Boris Yeltsin, which transferred some of the world's largest energy reserves to a small group of tycoons at the low prices of the mid-1990s, and say Russia risks repeating old mistakes.

Sechin has instead backed plans to take state energy and infrastructure assets under the control of Rosneftegaz, the state holding which owns around three-quarters of state oil major Rosneft and a small stake in Gazprom.

Critics have responded that Rosneftegaz is a cover for a state asset grab.

Bureaucratic infighting erupted into the open when a decree defining Rosneftegaz as the government's investment vehicle for privatisations was diluted to say it "may" play that role.

In rare public remarks on the contentious issue, Putin said before the meeting proceeded behind closed doors on Tuesday that the government would stay the current course on privatisation, without selling more assets on the cheap.

"Of course you cannot call it privatisation in the direct sense if Rosneftegaz participates in the acquisition of state company shares," Putin told a meeting of a newly formed energy advisory council, adding the state had an obligation to help regulated companies boost their value before selling them.

"That does not mean we should limit ourselves to participation by Rosneftegaz," he said.

Sechin, deputy prime minister and energy "tsar" in Putin's last government, has taken over as Rosneft CEO but has sought to retain political influence while outside government by becoming secretary of the energy council. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ FACTBOX-Russia's privatisation plan ANALYSIS-Putin won't ditch state capitalism ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

RIGHT-HAND MAN

After the meeting, Deputy Prime Minister Arkady Dvorkovich, a chief architect of the privatisation programme who sat at Putin's right hand during the meeting while Sechin sat at his left, emerged from the gold leaf-encrusted hall of the Grand Kremlin Palace to say the utilities proposal had been deferred.

He said the commission, chaired by Putin, agreed on structural consolidation of electricity infrastructure through the combination of the Federal Grid Co and the national distribution firm MRSK.

But an airing of ownership issues yielded no clear decision. A government source and a source close to the meeting's participants said one bone of contention was a plan to take state hydropower generator RusHydro under effective control.

Under that plan, they said, Rosneftegaz would purchase an additional share issue, a swap of assets with another state utility, Inter RAO, and the transfer of the state's current 53 percent stake to the holding for management.

"We have agreed on the need to integrate electricity grids and distribution networks. Questions remain as to whether such an entity would be efficient with Rosneftegaz as a shareholder. They will be reviewed separately," Dvorkovich told reporters.

"As far as RusHydro and Inter RAO are concerned ... an order was given to consider all possible means of financing investment, including equity participation by Rosneftegaz. But this is not under consideration as the only means of financing."

Dvorkovich and Sechin disagreed in their remarks after the meeting, Dvorkovich advocating transfer of 90 percent of Rosneftegaz dividend receipts to the budget while Sechin said Rosneftegaz would make contributions to the budget based on its own investment requirements.

But Putin lent support to Sechin's stance that state assets should not be sold cheaply. Any sale of state energy assets should bring systemic benefits, he said, adding there was no point selling companies at low valuations now.

"The market capitalisation of RusHydro will rise to $40 billion in the coming year from $7.5 billion now. Why sell for $7.5 billion what you can sell for $40 billion?"

Utility shares rose 3-6 percent after the meeting, except for Inter RAO, which fell 0.88 percent. (Additional reporting and writing by Melissa Akin; editing by Jason Neely)