India's Tech Mahindra won a bidding auction for fraud-hit Satyam Computer Services on Monday, in a deal that could lift the mid-sized outsourcer into the top tier of local software services firms.

Satyam said Tech Mahindra agreed to buy a 31 percent stake at 58 rupees per share -- a 23 percent premium to Satyam's last closing price -- edging out bids from engineering conglomerate Larsen & Toubro , which had been seen as a front-runner, and U.S.-based outsourcing firm Cognizant Technology Solutions .

Local television said the 51 percent stake would cost 28.9 billion rupees ($580 million).

Tech Mahindra shares surged by as much as 25 percent after Larsen & Toubro, which owns 12 percent of Satyam, was reported to have dropped out of the bidding, but trimmed their gains to trade 14 percent higher by 0705 GMT.

Satyam shares were up 6.4 percent at 50.15 rupees, after earlier jumping 16 percent to a nine-week high.

Satyam's government-appointed board met in Mumbai to go over the bids submitted for a 51 percent stake in the outsourcing company. The winning bid has to be approved by the Company Law Board (CLB), which said it expected Satyam to seek approval within 2-3 days.

Three months ago, Satyam's founder and chairman shocked investors by saying profits had been overstated for years, and put in doubt the survival of a company once ranked as India's fourth-largest software services exporter.

The government quickly stepped in and sacked the board to limit damage to India's once-shining IT services sector.

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Analysts have said Satyam looks attractive due to its long list of marquee clients and after a plunge in its market value caused by the $1 billion-plus fraud.

However, they are unsure how to value the company due to uncertainty about its accounts and legal liabilities arising from lawsuits filed in the United States by its shareholders.

The winning bidder would buy a 31 percent stake in Satyam through a preferential allotment of new shares, and then make a public offer to buy 20 percent more, as required by Indian law.

In October, Satyam had said it had around 53,000 employees and more than 600 clients including General Electric , Cisco Systems and Qantas Airways .

It has not reported results since releasing July-September figures in October. Its accounts are in the process of being restated.

($1=49.9 rupees)

(Additional reporting by Prashant Mehra & Narayanan Somasundaram; Writing by Sumeet Chatterjee; Editing by John Mair & Ian Geoghegan)

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