(Updates with market reaction, press conference, analyst and trader comments)
BRASILIA/RIO DE JANEIRO, Aug 22 (Reuters) - A proposal to privatize Brazilian utility Eletrobras could improve the efficiency of the power sector rather than simply fix the government's budget issues, officials said on Tuesday, as the company led a surge in shares of state-run firms.
Common shares in Centrais Eletricas Brasileiras SA , as the company is formally known, shot up 36 percent in early trading, their biggest daily gain since 1993. Preferred shares rose as much as 28 percent.
Brazil's government will give up its majority of voting shares, but has still not decided how much of its stake to sell and what model to use for the process, Deputy Finance Minister Eduardo Guardia told a news conference.
Still, Energy Minister Fernando Coelho Filho said the operation should be done by the middle of 2018, underscoring a rush to carry out free-market reforms before the unpopular President Michel Temer leaves office at the end of next year.
The privatization of Eletrobras could raise up to 20 billion reais ($6.3 billion), Coelho Filho told Reuters separately, adding that the process may involve the sale of new shares.
"We are proposing the issuance of new shares and, by doing that, current shares would be diluted," he said in a late Monday interview, adding that one buyer may not be able to take a controlling interest.
Those comments followed a note from the Mining and Energy Ministry saying the proposed privatization would make Eletrobras more agile and transparent, with a single class of stock and corporate governance meeting the highest standards on the Sao Paulo stock exchange.
The government will remain a shareholder and reserve the right to veto some strategic decisions, the ministry said.
The biggest gainers after Eletrobras on the benchmark Bovespa stock index were state-controlled firms Companhia Energetica de Minas Gerais SA, Banco do Brasil SA and Petroleo Brasileiro SA, rising 6 percent, 4 percent and 3 percent, respectively.
Traders said the Eletrobras news stoked expectations that the government was committed to shrinking its role in the economy, regardless of political resistance to privatizations.
The Mining and Energy Ministry compared the Eletrobras proposal to successful privatizations of planemaker Embraer SA and miner Vale SA in the 1990s.
Yet for many Brazilians the privatizations of that era were marred by scandals in the telecommunications sector, and the subject remains politically fraught even as the government has opened airports, highways and ports to private investment.
A protest briefly interrupted the government news conference on Tuesday, highlighting likely resistance from Brazil's opposition parties and powerful unions.
The proposal will be formally presented to the council of the government's Investment Partnership Program on Wednesday.
Deputy Energy Minister Paulo Pedrosa told journalists that Eletrobras may spin off its nuclear unit and the Itaipu hydroelectric dam, a joint venture with Paraguay.
Analysts at Itaú BBA cheered the government's decision, but warned of resistance in the capital Brasilia, where governing parties have long held sway over coveted Eletrobras jobs.
"Eletrobras has historically operated under the political influence of various political figures who may not be so enthusiastic about the company's privatization," they wrote.
They estimated the privatization could generate at least 40 billion reais in value for Eletrobras through cost-cutting, asset sales and other efficiencies.
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 51 percent voting shares, equal to 41 percent of the company's equity. State development bank BNDES also owns about 20 percent of common shares and 14 percent of preferred shares.
Coelho Filho said the government's plan will not allow a single group or investor to buy a large concentration of shares.
"We will create a series of rules to democratize this capital, possibly limiting the maximum stake per company," he told Reuters.
($1 = 3.16 reais)
(Reporting by Leonardo Goy in Brasilia, Rodrigo Viga Gaier in Rio de Janeiro, Additional reporting by Bruno Federowski, Ana Mano and Marcelo Teixeira in Sao Paulo; Writing by Brad Haynes, Editing by W Simon and Nick Zieminski)