* Petrobras plans to spin off assets to reduce debt
* Shares drop after early gain
* Deal hinges on market conditions (Adds background and Petrobras share performance)
SAO PAULO, Aug 7 (Reuters) - The board of Petróleo Brasileiro SA has backed a plan to seek regulatory approval for an initial public offering of the state-controlled oil producer's fuel-distribution unit, a securities filing on Friday showed.
Weeks after hiring the banks that will handle the deal, the company, known as Petrobras, said whether an IPO of the BR Distribuidora unit goes ahead will depend on global and domestic market conditions.
Still, Petrobras will seek all the necessary authorizations from securities industry watchdog CVM and other agencies to carry out the transaction, the filing said.
The decision to pursue the BR Distribuidora deal comes as Petrobras relies increasingly on cost reductions, asset sales, spinoffs and capital-spending cuts to stabilize rapidly growing debt in the face of a corruption scandal.
BR Distribuidora, which controls Brazil's largest gasoline, ethanol and diesel-station network, was recently valued at around $10 billion by UBS Securities analysts. A source with direct knowledge of the plan told Reuters recently that Petrobras will seek to sell a stake of at least 25 percent in the unit.
At the $10 billion valuation, BR Distribuidora's IPO would be the nation's biggest since BB Seguridade Participações SA's listing in April 2013. Proceeds would go to Petrobras and not to BR Distribuidora, in a transaction usually known as a secondary offering, the source said at the time.
Preferred shares in Petrobras wiped out early gains on Friday, and were down 0.6 percent at 10:30 a.m. local time (13:30 GMT). The decline was smaller than the 0.8 percent drop in the benchmark Bovespa stock index.
Petrobras did not specify terms of the transaction or a potential timetable in its filing. Still, the timing of the announcement, which coincided with the release of Petrobras' second-quarter results, suggests the company could price the offering as early as October.
Reuters reported last month that Petrobras had hired the investment-banking units of Citigroup Inc, Banco Bradesco SA, Itaú Unibanco Holding SA, Banco do Brasil SA, Grupo BTG Pactual SA and Bank of America Corp to manage the IPO. (Reporting by Guillermo Parra-Bernal; Editing by Alan Raybould, Joseph Radford and Peter Galloway)