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Japan advances casino resort bill but more delays seen likely

* Casino operators say broadly pleased with ruling coalition deal

* LDP, Komeito agree to set tax on casino revenue at 30 pct

* Casino floor space capped at 3 pct of total resort area

* Bill faces challenge to pass current parliament - sources

TOKYO, April 5 (Reuters) - International casino operators have welcomed an agreement by Japan's ruling coalition over key points needed to finalise legislation of large "integrated" resorts, which are expected to generate billions of dollars for the country and the industry.

The ruling Liberal Democratic Party and its coalition partner reached agreement this week on points from tax rates to casino floor space - closely watched by operators as they calibrate the potential size of investments in the country.

Japan legalised casinos in late 2016 after years of delay and still needs further legislation passed to set out how resort locations and operators will be selected and how the industry regulated.

But it faces a stiff task in passing the law in the current session of parliament, which runs to June 20, political sources said, potentially further delaying the opening of the first resorts.

Despite the potential for further delays, U.S. and Macau-based casino operators jockeying to win the first licenses told Reuters they were largely satisfied with the coalition deal.

"They are heading in the right direction, and we remain highly enthusiastic about the Japan opportunity," said William Shen, managing director of Korea and Japan at Caesars Entertainment Corp.

Japan, home to a large, wealthy population and attracting record numbers of foreign tourists, is seen by operators as one of the great untapped casino markets.

The last major greenfields opportunity in Asia was Singapore more than a decade ago and has generated significant revenues for the two casino operators there.

Just two Japanese casinos could bring in more than $10 billion in annual revenue, analysts have forecast. That potential market has sparked intense interest from U.S.-based Las Vegas Sands Corp, MGM Resorts International and a host of other firms.

In the biggest win for casino operators, casino floor space in Japan will be capped at 3 percent of the total area of the resorts - large-scale projects hosting casinos, retail and conference space. An absolute upper limit of 15,000-square-metres had been floated by the junior Komeito party.

Casino executives last year lobbied against an absolute limit, arguing it would force them to lower their investments and neuter the economic impact of the resorts.

The coalition also opted for a flat tax rate of 30 percent on casino revenue instead of a sliding tax scale, which was seen as negative for larger operators.

However, a packed legislative agenda means the bill may not pass until the autumn session of parliament, political sources said.

"We'd have to extend the session for it to pass this time," said one source, declining to be named given their proximity to the legislation. "Without doing so, it will be very difficult."

Prime Minister Shinzo Abe, battling a suspected cronyism scandal, is seen as unlikely to push for an extension on legislation that remains unpopular with the public, analysts said.

THREE LOCATIONS

Japan will limit the initial number of casinos to three sites - lower than the five or six suggested by the LDP.

Osaka is seen as frontrunner among major cities, which have attracted most attention from global operators.

Sites in Hokkaido in Japan's north and Kyushu in the south are the leading hinterland candidates. The locations will be chosen in late 2019 at the earliest, industry insiders said.

"It's appearing more likely that we just have one major urban resort, likely Osaka," said Jay Defibaugh, an analyst at CLSA. "The early market might not be what we have envisioned.

Residents of Japan will have to pay 6,000 yen ($56) to enter the casinos, lower than that suggested by the Komeito party. Foreign tourists will be able to enter for free.

Stiff entrance fees were planned to placate domestic opposition to casinos, centred on fears of a rise in gambling addiction. A poll by Kyodo news agency last month found 65 percent of Japanese opposed and only 26 percent in favour of casinos.

Operators have opposed entrance fees, with some saying privately that even a 6,000 yen fee will impact their business.

"The biggest challenge is the entrance fee," an executive at a major operator said on the condition of anonymity. "People who aren't crazy about gambling will become hesitant to go." ($1 = 106.7600 yen) (Reporting by Thomas Wilson. Editing by Lincoln Feast.)