* Overdue bills reach 2.6 bln euros in crisis
* Additional 500 mln euros in energy stolen
* Households, small businesses owe more than half
* Over 40 pct of Greeks in arrears on utility bills
* GRAPHIC - Greek energy crisis http://tmsnrt.rs/2o2KRRD
By Karolina Tagaris and Angeliki Koutantou
ATHENS, April 6 (Reuters) - Kostas Argyros's unpaid electricity bills are piling up, among a mountain of debt owed to Greece's biggest power utility.
His family owe 850 euros to the Public Power Corporation (PPC), a tiny fraction of the state-controlled firm's 2.6 billion euros ($2.8 billion) in unpaid bills.
Argyros picks up only occasional work as an odd-job man. "When you only work once a week, what will you pay first?" said the 35-year-old, who lives in a tiny apartment in an Athens suburb with his unemployed wife and four small children.
The Argyros family are emblematic of deepening poverty in Greece following seven years of austerity demanded by the country's international creditors. They burn wood to heat their home in winter, food is cooked on a small gas stove, and hot water is scarce.
The only evening light is the blue glare of a TV screen, for fear of racking up more debt. Five-watt lightbulbs provide a dim glow and Argyros worries about the effect on their eyesight.
More than 40 percent of Greeks are behind on their utility bills, higher than anywhere else in Europe.
People in poor neighbourhoods are also increasingly turning to energy fraud, meaning that the problem for PPC is much higher than the mountain of unpaid bills suggests.
Power theft is costing PPC around 500-600 million euros a year in lost income, an industry official said, requesting anonymity because he was not authorised to divulge the numbers.
PPC declined to comment on the figure. Public disclosures by the Hellenic Electricity Distribution Network Operator HEDNO, which checks meters, show that verified cases of theft climbed to 10,600 last year, up from 8,880 in 2013 and 4,470 in 2012.
Authorities believe theft is far higher than the cases verified by HEDNO, another official said, declining to be named.
Households in the country are equipped with analogue meters, which are easy to hack. One of the most common tricks is using magnets, which slow down the rotating coils to show less consumption than the real amount, a HEDNO official said.
Some websites even offer consumers tips and tricks on power fraud.
BURDEN OF ARREARS
For households who have had their electricity cut off, a group of activists calling themselves the "I Won't Pay" movement have taken it upon themselves to reconnect the supply. The group says it has done hundreds this year.
PPC, which has a 90 percent share of the retail market and 60 percent of the wholesale market, is supposed to reduce this dominance to less than 50 percent by 2020 under Greece's third, 86 billion euro bailout deal.
The lenders also want PPC to sell some of its assets, but the company is toiling under the debt of unpaid bills, a problem opposition lawmakers say will force a fire-sale.
In little over a year from June 2015, overdue bills to the 51-percent state-owned firm grew by nearly a billion euros to 2.6 billion, Chief Executive Manolis Panagiotakis told lawmakers in March.
Analysts estimate PPC's cash reserves have shrunk to about 300 million euros, forcing it to secure a 200 million euro bank loan to repay a bond due in May.
The tangle has left it with little leeway for new investments or to fund a switch to cleaner forms of energy from coal to improve environmental standards.
"It is often said that PPC is undergoing the most critical phase of its history," Panagiotakis told lawmakers. "I will not argue with that." He declined a Reuters request for an interview.
The burden of arrears for PPC is now "so big that some worry it will not be able to lift it for much longer", said energy expert Constantinos Filis.
The apartment building where the Argyros family live is a testament to that. Many tenants struggle even to pay the 25 euro annual fee to light communal areas such as staircases.
PPC has tried to recoup unpaid bills with phased repayment schemes. Α total of 625,000 customers owing a total of 1.3 billion euros had signed up to the scheme by January.
The Argyros family have also entered the scheme with the help of Theofilos, a local charity, which also contributes towards their monthly bills.
Meanwhile, PPC's provisions for bad debt remain high. The schemes drove the figure down to 453 million euros in the nine months to September last year from 690 million a year earlier. Analysts expect PPC to swing back to a profit of between 63-109 million euros in 2016, with provisions of below 600 million euros.
Filis, the energy expert, said the more things stayed the same, the closer PPC was to "ground zero" and he drew comparisons with the Greek state's brushes with near bankruptcy during the debt crisis.
"It's reasonable to say that PPC is too big to allow it to collapse, particularly regarding energy security," he said. "On the other hand, a few years ago some argued that no country could fail either."
(editing by David Stamp)