* Hellman & Friedman offers $2.14 bln, vs $2.06 bln from TPG
* Bids come as Australia govt weighs foreign ownership rules
* Fairfax a casualty of the flight to online media (Recasts with second bid, adds shareholder comment, background)
By Byron Kaye and Jamie Freed
SYDNEY, May 18 (Reuters) - Australia's oldest newspaper publisher Fairfax Media Ltd on Thursday said it has received a takeover bid worth as much as A$2.87 billion ($2.13 billion) from a second U.S. private equity firm, sending its shares sharply higher.
The surprise offer from buyout firm Hellman & Friedman values Fairfax at A$1.225 to A$1.25 a share, compared to an earlier offer from TPG Capital Management and Ontario Teachers' Pension Plan Board of A$1.20 a share.
Investors welcomed the prospect of a bidding war for the 186-year-old publisher of the Sydney Morning Herald and the Australian Financial Review newspapers, although lawmakers have expressed concern over the possible impact on local journalism.
"It is always good that there is a bit more competitive tension," said Suhas Nayak, a portfolio manager at Allan Gray, which holds Fairfax shares.
"It is a waiting game from here."
Fairfax shares leapt 6.7 percent to A$1.24 by mid-session on Thursday, in line with Hellman's indicative offer range. The broader sharemarket was down 1.2 percent.
The Sydney-based publisher said it would allow both suitors to conduct due diligence "to explore whether a potential whole of company proposal is available".
The chairman emeritus of Hellman, Brian Powers, was the chairman of Fairfax from 1999 to 2002. Hellman declined to comment. TPG said it welcomed the opportunity to conduct due diligence and declined to comment on the Hellman bid.
Fairfax investors have watched the stock sink from A$4.99 in 2007 when its long-term problems began with the migration of classified advertising to the internet. The shares hit a low of 36 Australian cents in 2012 and have barely recovered despite rounds of slashing cost cuts.
Its real estate classifieds unit, Domain, is now its biggest profit generator, and shareholders have been eager for the company to spin off the unit as Rupert Murdoch's News Corp did with its property website in 1999. Shares in that company, REA Group Ltd, have climbed from A$6.00 to A$61.88 over the past decade.
Analysts expect any private equity buyer to keep Domain and metropolitan mastheads and dump non-core regional news, radio and streaming video businesses, raising fears for the future of public interest journalism in a market already dominated by a handful of media proprietors.
Any foreign takeover of Fairfax would need regulatory approval, and some lawmakers have already threatened to oppose the TPG deal on public interest grounds.
Opposition Labor Senator Sam Dastyari on Wednesday told a parliamentary inquiry into the future of journalism in Australia he supported placing "controls and restrictions" on TPG if its bid was approved.
$1 = 1.3417 Australian dollars Reporting by Byron Kaye and Jamie Freed; Editing by Stephen Coates