* Idemitsu family may block takeover, veto board decisions
* Idemitsu: no change in plan to buy RDS' stake in Showa Shell
* A deal would have been the second in Japan's refining sector
* Analysts say founding family worried about stake dilution
By Taiga Uranaka
TOKYO, Oct 13 (Reuters) - Japanese refiner Idemitsu Kosan Co Ltd has put on hold its plan for a full takeover of smaller rival Showa Shell Sekiyu indefinitely after running into fierce opposition from the Idemitsu founding family.
The postponement raises fresh questions over whether the two firms will ever be able to combine businesses given that the founding family, which owns just over a third of Idemitsu, could either block a full deal outright or even if it was not blocked, could veto board decisions.
The Idemitsu family argues that Idemitsu can and should survive on its own, citing the firms' different corporate cultures. Analysts say, however, the family is more likely concerned that its stake in the company would be diluted.
Idemitsu management said on Thursday that it will press ahead with one section of the deal - a signed agreement to acquire a 33.3 percent stake in Showa Shell for about 170 billion yen ($1.7 billion) from Royal Dutch Shell this month or in November. Royal Dutch Shell also said it was committed to the sale.
The founding family has, however, previously claimed it will be able to scuttle this part of the transaction too after buying a small stake in Showa Shell.
That purchase has meant that if Idemitsu buys the stake from Royal Dutch Shell, Idemitsu may have to make a tender offer for the rest of Showa Shell shares at a price much higher than current market levels - a move it would be reluctant to undertake.
Idemitsu CEO Takashi Tsukioka told a news conference that while the company was no longer aiming for an full acquisition by April 1 as initially envisioned, management had no intention of abandoning the plan altogether.
"We have sent a message to our staff that we will definitely complete the merger," he said.
A takeover was to have been the second in the domestic refining sector after JX Holdings Inc's planned takeover of TonenGeneral Sekiyu KK. Pressure to consolidate, both within the industry and from the government has been high, as gasoline demand declines due to a shrinking population.
Jiji news agency quoted Industry minister Hiroshige Seko as saying on Thursday that the merger was important to boost competitiveness in the refining sector.
A representative for the founding family was not immediately available to comment.
Shares in Idemitsu, Japan's second-biggest refiner by sales, fell 2.6 percent while Showa Shell's stock dropped 4 percent in Thursday trade. Both companies currently have a market value of around $3.6 billion although Idemitsu is bigger in terms of sales and refining capacity.
Naoki Fujiwara, a fund manager at Shinkin Asset Management, said a postponement would be disappointing.
"Consolidation is necessary when looking five to 10 years ahead. The market is shrinking and refiners need to pursue economies of scale," he said.
$1 = 102.9000 yen Reporting by Taiga Uranaka; Additional reporting by Yuka Obayashi, Osamu Tsukimori, Yoshiyuki Osada, Tetsushi Kajimoto and Aaron Sheldrick in Tokyo as well as Karolin Schaps in London.; Editing by Muralikumar Anantharaman and Edwina Gibbs