By Tom Hals and Ben Klayman

Dec 6 (Reuters) - A123 Systems Inc, a bankrupt maker of batteries for electric cars, was expected to kick off its politically sensitive auction on Thursday pitting a U.S. bidder against at least three foreign rivals for a company that was partly funded with U.S. government money.

Johnson Controls Inc of Milwaukee and Wanxiang Group Corp of China have both said they qualified to bid for A123, which makes lithium-ion batteries.

NEC Corp of Japan and Siemens AG of Germany also qualified to bid, according to two people familiar with the auction who asked not to be identified.

NEC and A123 declined to comment and Siemens did not respond to a request for comment.

In addition to the four primary bidders, other parties were eyeing smaller pieces of A123, according to the sources.

The auction was being held behind closed doors in the Chicago law offices of Latham & Watkins, but had not started at 10 a.m. (1600 GMT) as planned, according to the people familiar with the sale.

The start was delayed as parties reviewed contracts and other details. "It's not like we're bidding on gas stations," said a person familiar with the auction.

The auction could run into next week, according to Bojan Guzina, a Sidley Austin attorney who represents Wanxiang.

Wanxiang may face added political risks with its bid.

U.S. politicians have warned that A123 and its U.S. taxpayer-financed technology must not fall into the hands of a Chinese company. If Wanxiang or another foreign buyer wins the auction, it would likely need approval from the Committee on Foreign Investment in the United States to complete the deal.

The U.S. government has also warned it must give its consent before its $249 million grant to A123 can be transferred to a new owner. The battery maker can still draw $120 million under various government grants, according to court records.

A123, whose customers include Fisker Automotive, General Motors Co, BMW and the U.S. military, received the U.S. government grant as part of a program to promote clean energy.

Wanxiang has had its eyes on A123 for a while. The Chinese company struck a $465 million investment deal meant to save A123 from bankruptcy earlier this year. That agreement fell apart after A123 failed to meet certain criteria, according to court documents.

The Chinese company is no stranger to investing in the United States.

Wanxiang generates about $1 billion in revenue in the United States by supplying parts to GM and Ford Motor Co and has bought or invested in more than 20 U.S. companies, many of them in bankruptcy, according to a Congressional report.

Those past investments could help Wanxiang get approval to buy A123, but the deal will be closely scrutinized because it involves advanced technology, according to Andrew Szamosszegi, who wrote the report for the U.S.-China Economic and Security Review Commission.

A123 filed for Chapter 11 bankruptcy protection in October with an initial bid for its automotive battery business from Johnson Controls for $125 million, subject to higher bids at the auction.

The money from the auction will go toward paying off A123's creditors. The company listed liabilities of $376 million when it filed for bankruptcy.

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