* Khazanah's IHH stake to fall to 26 pct, to retain board seat
* Transaction expected to complete in Q1 of 2019
* Deal kicks off Khazanah's portfolio restructuring
* Deal subject to IHH completing Turkish firm's stake buy
* IHH shares jump 8 pct, Mitsui up 1.4 pct (Updates to indicate picture available; adds clarity on sourcing in paragraph 4)
By Liz Lee and Anshuman Daga
KUALA LUMPUR/SINGAPORE, Nov 29 (Reuters) - Malaysian sovereign wealth fund Khazanah Nasional is selling a 16 percent stake in IHH Healthcare Bhd to Japan's Mitsui & Co Ltd for about $2 billion in cash, kicking off a restructuring of its portfolio under a new government.
In separate statements on Thursday, Khazanah and Mitsui said the Japanese trading house is paying 8.42 billion ringgit ($2.01 billion) to raise its stake in IHH to 32.9 percent and become the biggest shareholder of one of Asia's largest private hospital groups. Khazanah's stake will be cut to about 26 percent.
Citing sources, Reuters had reported in August that Khazanah will likely cut stakes in some top-linked firms as the new government of Prime Minister Mahathir Mohamad overhauls the fund's investment strategy, and that it could also review its stake in IHH Healthcare.
A senior banker at a Malaysian bank which has done deals with Khazanah and other state-linked companies said this marked the beginning of a rationalisation exercise for the fund.
"Probably they will maintain some of the more strategic investments, like some of the utility holdings. Some of the non-core ones and what they think they can rationalise, they will rationalise," the banker said, declining to be named because he was not authorised to speak to the media.
Bankers expect the $37.5 billion fund to trim stakes in lender CIMB Group Holdings and regional telecoms firm Axiata Group, and also restructure struggling Telekom Malaysia in the coming months.
"The divestment is part of Khazanah's strategy to grow the businesses that we are invested in and to find the appropriate times and value to create liquidity for our future capital and investment needs," Khazanah Managing Director Shahril Ridza Ridzuan said in the statement.
Facing a shrinking domestic population, Japanese trading house Mitsui has been expanding in Asia's growing healthcare market. It first bought a stake in IHH in 2011.
"Demand for medical care is rapidly increasing with economic growth and ageing whereas Asia continues to face shortage of hospital beds and doctors," Mitsui said.
IHH has transformed into a leading player in Malaysia, Singapore, Turkey and India, and in its key growth markets of China and Hong Kong, becoming one of the world's largest listed healthcare groups with a market value of $10 billion.
It recently took control of India's Fortis Healthcare in a tightly contested takeover battle, paying more than $1 billion to gain ownership of over 30 hospitals.
Khazanah anticipates the IHH stake sale will be completed by the first quarter in 2019, subject to relevant regulatory approvals and IHH completing a previously announced acquisition of a 30 percent additional equity stake in a Turkey-based healthcare group Acibadem Saglik Yatirimlari Holding A.S.
Shares in IHH rose 8 percent on Thursday, while Mitsui shares were up 1.4 percent. ($1 = 4.1910 ringgit) (Reporting by Liz Lee and Anshuman Daga; Editing by Muralikumar Anantharaman)