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By Conor Humphries and Rosalba O'Brien
FARNBOROUGH/SANTIAGO July 12 (Reuters) - Qatar Airways has agreed to acquire up to 10 percent of LATAM Airlines, the two companies said on Tuesday, in a $613 million deal that sent shares in Latin America's largest airline soaring.
The deal, announced at the Farnborough air show in England, follows Qatar Airways' purchase last year of 15 percent of British Airways owner International Airlines Group, which, like Qatar and LATAM, is a member of the Oneworld airline alliance.
The move is part of a rapid global expansion by the Doha-based airline, which was due to talk to Italian carrier Meridiana later on Tuesday about the proposed purchase of a 49 percent stake.
Shares in LATAM hit their highest level in over a year, up as much as 25 percent before paring gains to trade up 14 percent by 11 a.m. ET (1600 GMT) at 5,180 pesos in Santiago and $7.90 in the United States..
Latin American airlines have struggled as a global commodities downturn has sapped growth and weakened currencies, but the region's growing middle class and untapped potential still make it an attractive target for foreign carriers.
U.S. airlines are circling Panama-based Avianca Holdings SA , while Brazilian government plans to loosen tough restrictions on foreign ownership of its airlines could lead to a rush of badly needed fresh capital.
For LATAM Airlines itself, the deal removed a key risk for the stock, BCI analyst Marcelo Catalan said, as the broker put its stance and price target under review.
The company was formed in a tie-up between Chile's LAN and Brazil's TAM in 2012, giving onetime investor darling LAN access to the region's biggest market before U.S. carriers could swoop in.
But it has struggled to live up to the promise of its merger, with full-year earnings losses reported in the last four years.
It has responded by reducing fleet spending and cutting capacity, particularly in Brazil. In the first quarter of 2016, it posted its first profit since 2014, but it has said long-term recovery is dependent on an improvement in Brazil's economy.
The agreement with Qatar Airways allows Qatar to acquire up to 10 percent of LATAM's total shares following a capital increase of $613 million, through the issuance of new shares at $10 per share. The airline's controlling shareholder families have agreed to the transaction.
"We think this makes LATAM more financially solid and generates more investor confidence on the corporate strategy," said Catalan.
As LATAM has cut capacity in Brazil, it has built up a hub in Pacific-facing Lima and indicated that it is eager to improve links with Asia.
"In addition to strengthening our financial position, (this deal) will allow us to explore new opportunities for connectivity with Asia and the Middle East," LATAM's chief executive, Enrique Cueto, said on Tuesday.
The deal will give Qatar the right to name a board member, subject to approval by the rest of the board. (Reporting by Conor Humphries in Farnborough and Rosalba O'Brien in Santiago, Additional reporting by Felipe Iturrieta; Editing by Mark Potter and Jonathan Oatis)