(Recasts with share performance, valuation, background throughout)
SAO PAULO/BRASILIA, Aug 21 (Reuters) - Brazil on Monday floated a proposal to cede control of the country's biggest power utility, Eletrobras, in the boldest privatization yet by a government struggling to close a record budget deficit, sending Eletrobras' shares soaring in after-market trading.
The Mining and Energy Ministry gave Centrais Elétricas Brasileiras SA, the holding company known as Eletrobras, notice of the plan and said publicly that it would bring the proposal to President Michel Temer's special council on privatizations.
While both the privatization model and terms are yet to be decided, the government will keep a right to veto some strategic decisions, the ministry said in a statement.
American depositary receipts of Eletrobras surged 20 percent on the news, hitting $5.34 in after-market trading. Earlier, the ADRs closed at $4.45 on Monday in New York.
Temer has worked to attract private investment to Brazil's energy and transportation infrastructure, but giving up control of a state-run company would mark a sharp contrast with other politicians' wariness about unpopular privatizations.
A successful sale of the government's Eletrobras stake would help Temer hit a recently widened budget target and avert a another debt rating downgrade after Brazil's worst recession on record.
The government sees its stake in Eletrobras as worth at least 12 billion reais ($3.8 billion), a government source said.
The value of Eletrobras' equity stood at 31 billion reais at the end of May, according to the company's website. Brazil's federal government owns 41 percent of the company and a majority of its voting shares. State development bank BNDES owns about 20 percent of common shares and 14 percent of preferred shares.
The proposal to sell control of Eletrobras will be formally presented to the council of the government's Investment Partnership Program on Wednesday, according to another person with direct knowledge of the plan.
Eletrobras declined to comment further on the plan.
Given that Eletrobras is listed in São Paulo, New York and Madrid and has a significant number of non-state shareholders, the plan "demands careful analysis," the ministry said.
By selling control to private investors, the utility could lure more capital and undertake investments "without the limits that state companies often face," it added.
"It's a daring move that markets will certainly laud," said Alexandre Pavan Povoa, who oversees $100 million in assets for Canepa Asset Management in Rio de Janeiro. "It signals that Brazil is truly committed to an agenda of modernization, governance and rational budget spending."
This year, the government endorsed a plan by several state-controlled entities to dissolve Vale SA's controlling bloc, allowing the world's No. 1 iron ore producer to become a company with dispersed share ownership. The plan also eliminated any source of state meddling in the company.
Eletrobras has struggled for years with high debt, operating inefficiencies and little room for investments. The company's valuation metrics are well below a list of seven peers tracked by Thomson Reuters.
The Rio de Janeiro-based utility is also one of the state-controlled companies involved in a series of huge corruption scandals, and has for years been stacked with politically appointed jobs.
Temer's predecessor, Dilma Rousseff, used Eletrobras as a policy tool to fight inflation and spur growth, resulting in heavy losses from which the company has failed to fully recover. Her policies included forcing Eletrobras to take control of money-losing regional utilities and bear the brunt of drastic rate reductions.
Opting to choose equity markets over a merger shows that the government is feeling pressure to accelerate the deal and, at the same time, maximize the value of its stake, Povoa said.
"This type of privatization, which is a sale of control, tends to be faster because markets decide what's the best and fairest price for the asset," Deputy Mining Minister Paulo Pedrosa said in Brasilia.
Most holders of Class B preferred shares, the company's most widely traded stock, are foreign investment firms, including Norwegian sovereign wealth fund Norges Bank and BlackRock Inc, the world's largest money manager. Eletrobras company also has Class A shares in circulation.
($1 = 3.164 reais) (Reporting by Guillermo Parra-Bernal in Sao Paulo and Leonardo Goy in Brasilia; Additional reporting by Rodrigo Viga Gaier in Rio de Janeiro and Megan Davies in New York; Editing by Brad Haynes and Leslie Adler)