(Corrects story throughout after source clarifies that Bain is in talks to team up with Japan fund, not is replacing KKR in consortium)
* Bain in talks with Japan state fund -sources
* Western Digital showed its proposal to Toshiba recently -sources
* Western Digital has agreed to limit stake to 19.9 pct -sources
By Junko Fujita
TOKYO, June 9 (Reuters) - Bain Capital and a Japanese state-backed fund are in talks about teaming up to bid for Toshiba Corp's prized chip unit, sources familiar with the matter said.
The U.S. private equity firm would replace rival KKR & Co LP as the main partner of the state-backed fund and would be a minority investor in the consortium under the plan being discussed, one of the sources said.
Bain submitted a bid in the second-round of the auction with South Korean chipmaker SK Hynix.
The current consortium led by the Japan Innovation Network Corp fund is one of two frontrunners in the race for the world's second biggest producer of NAND flash memory chips.
The sources declined to be identified as the talks were confidential.
A representative for SK Hynix declined to comment. A representative for KKR was not immediately available for comment.
Western Digital, which jointly operates a key flash memory chip plant with Toshiba in Japan, has been planning to work with the Japanese state-backed fund and KKR in its proposal.
It recently presented an outline of its proposed bid to Toshiba, separate sources said.
The Japan-backed consortium is competing with U.S. chipmaker Broadcom Ltd which has partnered with U.S. private equity firm Silver Lake. Some sources say Broadcom may have the upper hand as it has submitted a higher bid that is also likely to invite less anti-trust scrutiny.
The Japan-backed consortium was also seen on the backfoot as Western Digital and Toshiba are at loggerheads over the sale of the chip unit, with the California-based firm claiming breach of contract.
In its bid, Western Digital initially hoped to gain a majority holding, but has agreed to limit its stake to 19.9 percent to appease the government, the sources said.
Toshiba is rushing to find a buyer for the business, which it values at $18 billion or more, to cover billions of dollars in cost overruns at its now-bankrupt U.S. nuclear business Westinghouse Electric Corp. (Reporting by Junko Fujita; Additional reporting by Makiko Yamazaki in Tokyo and Se Young Lee in Seoul; Editing by Edwina Gibbs)