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UPDATE 1-Activist Cevian sees big potential in Autoliv after investment

* Cevian talks up potential after taking stake Backs company plans to split into two (Adds Cevian comment, updates share price)

STOCKHOLM, March 2 (Reuters) - Activist investor Cevian Capital sees strong potential in Sweden's Autoliv after taking a stake worth around $850 million in the world's biggest maker of airbags and seat belts.

Cevian, whose portfolio includes large positions in European blue-chips such as ABB, Ericsson and Thyssenkrupp said it backed Autoliv's plans to split into two listed companies and saw upside in both businesses.

"We believe that the separation of (electronics arm) Veoneer and the creation of two focused companies is logical and will realize significant value," Cevian Managing Partner Christer Gardell said in an emailed comment.

"We are not talking about 10-20 percent upside, but significantly more," he added.

Shares in Autoliv, which plans to split into two listed companies, were up 1.1 percent at 1130 GMT compared with a 2.6 percent drop in the STOXX Europe Automobiles & Parts Index. .

Cevian said late on Thursday it owned 6.9 percent of the outstanding shares in Autoliv, which has a market value of more than 103 billion Swedish crowns ($12.50 billion).

BREAKING UP

Autoliv said last year it was planning to split into two listed companies, with one focused on high-tech safety gear such as radar products and vision systems to target growth related to advances towards self-driving vehicles.

Autoliv has also been winning new business for products such as airbags and seat belts from Japanese rival Takata, which has been at the center of the auto industry's biggest-ever recall and filed for bankruptcy last year.

Gardell said the passive safety business was highly cash generative and had been strengthening its market position.

"The market does not fully appreciate the value of this business," he said.

The passive safety business, which includes airbags and seat belts and currently generates the bulk of company earnings, will retain the Autoliv name.

The group also makes radar products, vision systems and advanced driver assistance software in its Electronics business, which will be named Veoneer.

"Veoneer is a very interesting company with tremendous growth potential," Gardell said.

With around $16 billion under management, Cevian prides itself on working with company management, eschewing the more aggressive tactics of Wall Street activists. It looks to influence from within, often seeking board positions at the businesses in which it invests.

In January, Autoliv reported fourth-quarter earnings above expectations, and forecast underlying sales would grow faster than analysts' expect in 2018.

"This is an extremely well-run company, with strong cash flow and good profitability," said Handelsbanken Capital Markets analyst Hampus Engellau, who has an "accumulate" rating on Autoliv.

"But Cevian seem to be viewing this in the same way that we do, that this split is not fully discounted and that further value will be created." ($1 = 8.2400 Swedish crowns) (Reporting by Johannes Hellstrom Editing by Keith Weir)