LISBON (Reuters) - The government of debt-laden Portugal on Thursday gave the formal go-ahead for the sale of its stakes in power utility EDP and power grid operator REN, which it wants to complete by the year end to comply with terms of a bailout.

The government said it is aiming to sell the stakes, worth a total of almost 2.3 billion euros ($3.1 billion) at current prices, directly to institutional investors, which is quicker than offering shares to the public.

The state has a 20 percent stake in EDP -- the country's largest company -- and a 51 percent in REN. It has promised to sell its stakes under the terms of a 78 billion euro European Union/International Monetary Fund bailout. The EDP stake is worth around 1.7 billion euros at current market prices, and the REN stake is worth about 570 million euros.

"The sale of the stakes under the privatization process will essentially be carried out via direct sale," the government said.

Luis Marques Guedes, secretary of state for cabinet matters, told reporters after a cabinet meeting a direct sale was a speedier solution, reflecting the urgency of the situation.

He said the government planned to sell the stakes directly to investors, "but if excessive shares happen to remain after the sale, it will be possible to resort to a public offering."

"In EDP's case, the government has received signals that there is a number of interested investors, which should rule out the need to resort to a public offering," he added.

The government has decided that investors who buy the EDP stake cannot also buy REN.

EDP Chief Financial Officer Nuno Alves said last week the company would prefer a power sector player and not investment funds to buy the stake and that EDP's industrial development plan will be part of the negotiations in the sale process.

Prime Minister Pedro Passos Coelho has visited Germany and France recently and wooed companies there to invest in the country's energy sector. According to sources, Germany's E.ON was involved in the talks.

France's GDF Suez has said it may consider taking part in the EDP sell-off. Brazilian state-run power holding company Eletrobras has also expressed interest, and media reports have said China Power International was ready to buy the state's stake.

The Portuguese government has also promised to sell its remaining 7 percent stake in oil company Galp this year. In addition, it plans to privatize TAP air carrier, the national airport service ANA, postal service CTT, water company Aguas de Portugal and RTP public television.

EDP shares, which have so far this year outperformed the declining broader Lisbon stock index on hopes for a privatization, were off 0.8 percent on Thursday afternoon compared with a 0.7 percent rise in the PSI20 index, while REN was up 0.2 percent. ($1 = 0.735 Euros)

(Reporting By Daniel Alvarenga, writing by Andrei Khalip)