By Manuel Mogato and Stuart Grudgings

MANILA/KUALA LUMPUR (Reuters) - Negotiators from the Philippine government and the country's largest Muslim rebel group began a fresh round of peace talks in Kuala Lumpur on Tuesday, aiming to seal an agreement to end 40 years of conflict in the south of the mainly Catholic state.

Government and rebel negotiators are closing in on a peace deal after nearly 15 years of violence-interrupted talks, a potential landmark success for President Benigno Aquino that could pave the way for more investment in the country's impoverished but resource-rich south.

A peace deal with the Moro Islamic Liberation Front (MILF)would set up an expanded autonomous area for Muslims on Mindanao island, giving them more political and economic powers including a bigger share in revenues from natural resources and a more active role in internal security.

"The road is not that long, but it's still very hard to tell if we will reach there," Mohagher Iqbal, the rebels' chief negotiator, told Reuters by text message late on Monday.

"But we are close to it."

The deal to end one of two long-running insurgencies in the Philippines, which have killed more than 160,000 people, could be signed as early as this week if the four-day talks in Malaysia are successful.

Despite the prospect of a peace deal with the MILF, Mindanao is likely to remain one of the most violent places in Asia, plagued by a long-running communist insurgency, heavily-armed clans, and radical Islamic splinter groups.

Iqbal said there are still some issues to be resolved in the latest talks, particularly on the shape and size of the new political entity, internal security and wealth-sharing arrangements.

The two sides are working towards a framework agreement, a roadmap that would create the new autonomous region before the end of Aquino's term in 2016.

The agreement would set up a 15-member transition commission which has until 2015 to draft a law creating the new entity to replace the current autonomous region that has been in place since 1989 and which is widely seen as a failure.

A peace deal could boost Aquino's efforts to attract investments in the minerals, oil-and-gas and agro-industrial sectors in the south.

(Editing Jeremy Laurence)