* Merger with Showa Shell has been opposed by Idemitsu family
* Idemitsu plans to issue $1.2 bln in new shares
* Founding family says will seek court injunction
* Showa Shell surges 7 pct, Idemitsu slides 11 pct on dilution (Adds that founding family has filed a lawsuit to stop the share sale in 7th paragraph)
TOKYO, July 4 (Reuters) - Idemitsu Kosan Co has a good chance of sidestepping founding family opposition to a merger with Showa Shell Sekiyu with its $1.2 billion share offering, analysts said, a plan that sent Showa Shell shares surging on Tuesday.
Idemitsu management has been keen to merge its operations with the smaller Japanese refiner as shrinking gasoline demand in the country pushes the industry to consolidate, but has been locked in a battle with the Idemitsu founding family for more than a year over the move.
Acting quickly with a share issue plan last year would have come across as a blatant move to dilute the founding family's stake of more than third and drawn the ire of the Tokyo stock exchange and other authorities.
Idemitsu on Monday said the share issue would raise funds to repay loans for a 31.3 percent stake already bought in Showa Shell as well as to develop overseas operations. It has denied it is trying to dilute the founding family's holding.
Although the founding family, which says the two firms' cultures will not mesh, quickly said it would seek a court injunction, investors rushed to bet on the success of the plan.
Showa Shell's shares jumped 7 percent while Idemitsu's stock tumbled 11 percent on the forthcoming dilution.
Lawyers representing the family said after the market closed that an injunction had been lodged with a court in Tokyo.
"This capital increase will lower the stake held by the founding family and make the proposed merger with Showa Shell Sekiyu more realistic," Nomura analyst Shigeki Matsumoto said in a note to clients.
Idemitsu said it would sell 48 million new shares, equivalent to 30 percent of its outstanding shares.
If the family did not take part in the fundraising, its stake in Idemitsu would be reduced to about 26 percent, according to calculations by Thomson Reuters, eliminating its ability to veto the merger.
"Obviously the family could participate in the global offering, but the time frame is narrow to come up with such a large amount of cash, in our view," said Thanh Ha Pham, an analyst at Jefferies in Tokyo.
"This is a positive for Showa Shell (as) Idemitsu will eventually decide to fully take over Showa Shell's minorities and merge the two companies," said Pham.
Overcoming opposition from the founding family, last week, Idemitsu's CEO Takashi Tsukioka, who has been pushing for a full merger, was re-elected to the company's board at an annual shareholders' meeting.
If the deal goes through, it would be the second in the domestic refining sector after JX Holdings Inc bought TonenGeneral Sekiyu. (Reporting by Aaron Sheldrick, additional reporting by Osamu Tsukimori; Editing by Edwina Gibbs and Himani Sarkar)