* Australia to build publicly-funded 2nd airport for Sydney
* Private sector deemed $3.8 bln project too risky
* Qantas sees potential for low-cost hub (Recasts throughout, adding CEO and economist quotes)
By Tom Westbrook and Byron Kaye
SYDNEY, May 2 (Reuters) - The Australian government said on Tuesday it will build a A$5 billion ($3.76 billion) second international airport in Sydney, ending decades of indecision on the project which private investors deemed too risky and expensive.
The government stepped in after Sydney Airport Holdings declined its right to develop and run the new hub, even though its withdrawal promises to end its airport monopoly in Australia's biggest city and tourist drawcard.
But the site at Badgery's Creek is 40 km (25 miles) from central Sydney compared with 8 km for the existing airport, and critics question its viability without a rail link to the city. Airlines also warn that fees will need to be low to encourage them to switch.
"It's a burden that the government has the capacity to bear - the burden being not simply the costs, but the risks," independent economist Saul Eslake told Reuters.
"Nobody really knows what the demand for services at this facility is likely to be."
Prime Minister Malcolm Turnbull said the project would inject more than A$1.9 billion into the economy during the construction phase alone.
It is expected to open in late 2026 and boost inbound air passenger numbers to Sydney by about a quarter, or 10 million people per year in the early years.
Sydney Airport, which had first right of refusal to build the airport, earlier on Tuesday said it would not proceed with the project which it had previously called "deeply uneconomic".
"The risks associated with the development and operation of the airport are considerable, and that will continue for many decades without commensurate returns for our investors," Sydney Airport Chief Executive Kerrie Mather said at the Macquarie Australia Conference, an economic forum.
Sydney Airport will lose its monopoly as a result, but it could benefit from lower-margin domestic traffic migrating to the second airport, allowing it to accept more lucrative international traffic, analysts say.
The semi-rural site at Badgery's Creek on Sydney's western outskirts was first mooted in 1946 as the limits of the first airport - hemmed in by suburbs and the sea in the city's east - became clear.
The new airport is initially envisaged as a low-cost hub for mostly domestic flights by airlines like Qantas Airways Ltd's budget arm Jetstar. Sydney Airport has the highest landing fees in Australia.
"You need to have it like Stansted, a low-cost operation, an airport that's designed for those purposes," Qantas Chief Executive Alan Joyce said at the Macquarie event, referring to London's low-cost hub.
While the opposition Labor Party supports a government build, shadow transport spokesman Anthony Albanese on Tuesday said it was "essential" for a rail line to be "up and running from day one".
The government said it is studying railway routes but has not promised a line as part of the initial build.
It also flagged its possible sale after construction.
"In due course you would expect this infrastructure asset to return to private ownership," Infrastructure Minister Paul Fletcher told Sky News television.
Turnbull said more details on the project would be provided in next week's federal budget. ($1 = 1.3287 Australian dollars) (Reporting by Jamie Freed, Tom Westbrook and Byron Kaye; Editing by Jane Wardell and Stephen Coates)