* Decision was made by Toshiba's board -sources
* Toshiba to make announcement later on Wednesday -sources
* Western Digital wouldn't agree to terms on future stake- source (Recasts and writes through with details)
By Taro Fuse and Kentaro Hamada
TOKYO, Sept 20 (Reuters) - Japan's Toshiba Corp has selected a group led by U.S. private equity firm Bain Capital to buy its prized memory chip unit, three people with knowledge of the talks said on Wednesday, the latest dramatic twist to a highly contentious auction.
The decision was made by Toshiba's board and will be announced later on Wednesday, two sources said. The people declined to be identified as they were not authorised to speak on the matter.
Toshiba declined comment. A representative for Bain was not immediately available for comment.
The auction of the world's No. 2 producer of NAND semiconductors has been marked by a slew of revised bids, changing alliances among suitors, as well as legal wrangling from chip joint venture partner Western Digital Corp - a threat that still hangs over the sale.
Three separate sources had told Reuters late Tuesday that Toshiba was shifting back towards selling the unit to a group backed by Western Digital.
But one of people speaking on Wednesday said Western Digital had failed to agree on limits to the U.S. firm's future stake in the chip business that had been demanded by Toshiba.
A representative for Western Digital was not immediately available for comment.
The embattled Japanese conglomerate has little time to waste and has been under pressure from its lenders to clinch a deal this month to ensure enough time for regulatory reviews so that it can finish the sale by the end of the financial year.
If it doesn't, it won't have the funds to plug a huge hole in its finances and could be delisted. Even without that problem staring it in the face, the semiconductor business requires huge amounts of investment and Toshiba's chip unit runs the danger of losing its competitive ability as rivals roll out big capital spending plans.
Bain has partnered with South Korean chipmaker SK Hynix Inc and has also brought in U.S. tech firms such as Apple Inc and Dell Inc, both buyers of Toshiba chips, to bolster its offer, which sources have said is worth some $22 billion.
SK Hynix declined to comment.
But a deal is likely to face fierce opposition from rival bidder Western Digital, which argues any pact will need its consent.
The U.S. firm has already taken the dispute to the International Court of Arbitration to prevent the sale and a source with knowledge of the matter has said it is prepared to seek an immediate court injunction.
Reporting by Taro Fuse and Kentaro Hamada; Additional reporting by Makiko Yamazaki, Junko Fujita, Tom Wilson in Tokyo and Joyce Lee in Seoul; Writing by Makiko Yamazaki; Editing by Edwina Gibbs