UPDATE 3-TPC Group gets higher buyout offer from Innospec

* Potential offer at $44 to $46 per share in cash

* TPC says will consider the non-binding proposal

* Shares of TPC closes 12.8 pct higher

(Adds Sandell comment, TPC and Innospec share close)

Oct 8 (Reuters) - Chemicals maker TPC Group Inc on Monday said it received a buyout proposal from Innospec Inc

worth as much as $721 million, topping an offer from two private equity firms made in August.

Private equity firms First Reserve Corp and SK Capital Partners in August had offered $627.2 million to acquire TPC.

The deals pit the private equity industry's desire to expand into a high-margin sector against a chemical industry veteran's attempt to expand.

TPC's main product is butadiene, used to make synthetic rubber for tires and other automotive products. But weak demand has pressured its business this year as prices for butadiene have fallen sharply, causing a trough in TPC's market.

Innospec, a specialty chemical maker, could offer $44 to $46 per share in cash, TPC said in a statement on Monday.

First Reserve and SK Capital offered $40 a share in late August.

TPC shares have consistently traded above the $40 price offered by the private equity firms, and at least two of TPC's top-10 shareholders have said they will vote against the deal.

"We urge TPCG to abandon the First Reserve deal, pursue the Innospec bid and solicit interest from other potential buyers in a full-blown auction to ensure that shareholder value is maximized," third-largest shareholder Sandell Asset Management Corp said in a statement late Monday.

Sandell owns about 7 percent of TPC as of Oct. 2, according to Thomson Reuters data.

TPC said it will consider the non-binding proposal from Innospec. It previously said a transaction with First Reserve and SK Capital Partners would be in the best interest of shareholders.

Perella Weinberg Partners LP is advising TPC. Blackstone is providing equity financing for Innospec.

TPC shares closed at $45.88 while Innospec shares closed at $33.37 on Monday on the Nasdaq.

(Reporting by Ernest Scheyder in New York and Krishna N. Das and Divya Lad in Bangalore; Editing by Don Sebastian and Leslie Adler)