* Purchase of stake over 40 pct needs regulatory approval
* Deal for 19.9 pct stake set to be completed within days
* Danamon shares surge 14 pct but below agreed price with Temasek (Recasts and adds deal milestones, analysts' comments)
JAKARTA, Dec 27 (Reuters) - Japan's Mitsubishi UFJ Financial Group (MUFG) said it was cautiously optimistic of winning approval to take control of PT Bank Danamon Indonesia - in what could become the biggest acquisition of an Indonesian firm on record.
A successful transaction would also mark a rare major deal by an overseas lender in Indonesia's banking sector after caps on foreign ownership were introduced in 2012 and give hope to other foreign banks keen to expand in Southeast Asia's biggest economy.
MUFG announced on Tuesday it had agreed with Temasek Holdings, Singapore's state investment arm, to buy 73.8 percent of Indonesia's fifth-largest bank in three stages, adding that eventually it wants to make it wholly owned.
But it will need Indonesia's financial services regulator OJK to grant special permission to take its holding beyond 40 percent - where foreign ownership of commercial banks is normally capped though exceptions are sometimes made.
The first part of the Danamon acquisition - a purchase of a 19.9 percent stake worth $1.2 billion and which values the bank at about $6 billion - is due to be completed within days.
By comparison, the biggest deal to date involving an Indonesian firm is Philip Morris' $3 billion acquisition of a 60 percent stake in HM Sampoerna in 2005, according to Thomson Reuters data.
"The deal could spur further consolidation in the industry. Regulatory approvals are still a major question, but there is a high chance for the deal to proceed," said Alexander Margaronis, analyst at UOB Kay Hian in Jakarta.
Takayoshi Futae, MUFG's chief executive for Asia and Oceania, told a news conference that the Japanese bank was in continuous discussions with OJK and was "cautiously optimistic" it would be granted approval to take its holding beyond 40 percent.
Danamon's shares jumped 14 percent on Wednesday to 6,825 rupiah per share although that was still below the 8,323 rupiah per share agreed with Temasek.
The deal would allow MUFG to expand further in Southeast Asia where banking penetration is low and growth rates are far more attractive than its saturated home market.
"Danamon's lending margin is 9.2 percent, which is more than 10 times higher than the average lending margin in Japan," said Yoshinobu Yamada, senior analyst at Deutsche Securities.
"Also Indonesia and Thailand have a large number of Japanese companies, which is why Japanese banks are targeting these markets," he added.
The second phase of the acquisition - a purchase of 20.1 percent stake - is expected to be completed in the second or third quarter of 2018, MUFG said.
OJK has previously granted an exception to the 40 percent rule as part of efforts to promote consolidation among Indonesia's 100-plus banks. In 2015 it allowed China Construction Bank Corp to take control of PT Bank Windu Kentjana International which then merged with another small domestic bank.
Japan's No. 2 bank, Sumitomo Mitsui Financial Group (SMFG) , also said this week it is keen to raise its stake to a majority in Indonesian lender BTPN if authorities permit. ($1 = 13,558 rupiah) (Reporting by Fransiska Nangoy and Cindy Silviana; Additional reporting by Junko Fujita in Tokyo and Tabita Diela in Jakarta; Editing by Edwina Gibbs)