* Potash Corp owns 13.9 pct, seeks permission for another 11.1 pct

* Potash Corp says it's looking for investment flexibility

* Says no guarantee it will acquire additional shares (Adds comment from Potash Corp, background, share price move)

By Tova Cohen and Euan Rocha

TEL AVIV/TORONTO, Dec 19 (Reuters) - Canadian fertilizer maker Potash Corp is seeking permission from Israeli authorities to raise its stake in rival Israel Chemicals to 25 percent, a government source said.

"Potash Corp has requested approval from the government to raise its stake to 25 percent," the source, who asked not to be identified, told Reuters on Monday, confirming a report in the Calcalist financial daily.

Potash, the world's largest fertilizer manufacturer, holds 13.9 percent of ICL's shares valued on the market at 6.5 billion shekels ($1.7 billion). An 11.1 percent stake has a market value of about 5.23 billion shekels.

Shares in ICL, one of the world's largest potash producers and the second-largest company on the Tel Aviv Stock Exchange, were up 5 percent at 37.65 shekels in afternoon trade.

A spokeswoman for ICL said the company does not comment on matters relating to its shareholders. Potash last acquired ICL stock in 2010 when it bought about 2.5 percent.

A spokesman for Potash Corp confirmed that the company has asked for permission to raise its stake, but stressed that it is not a foregone conclusion that it will do so.

Potash Corp said that due to threshold restrictions it needs approval from the Israeli government to allow it to increase its stake to between 14 percent and 25 percent.

" If the application is granted, it will give us one more option in our use of free cash flow when we are making investment decisions ," said Potash Corp's head of public affairs, Bill Johnson.

" It is not a foregone conclusion that we would acquire any additional shares, but we are seeking the flexibility to move beyond the current threshold ," he added.

ICL is a strategic company which has exclusive rights to some of Israel's most valuable natural resources, including Dead Sea minerals. The government was given a golden share in ICL when it was privatized and as a result government approval would be required for Potash to raise its stake.

Barclays Capital analyst Joseph Wolf said Potash's request is not surprising, noting it has a strategy to own good potash assets and already holds 30 percent of Arab Potash Corp, which mines the Dead Sea from the Jordanian side.

"We believe this news should be a positive catalyst for the shares in the short term, as there has not been that much stock-specific good news lately," said Wolf, who rates ICL "overweight".

"In addition, it highlights that Potash sees value in ICL beyond any change in royalty fee or Dead Sea salt harvest cost," Wolf said.

ICL is in talks with the government over who should pay the costs of a plan to harvest salt in the Dead Sea to prevent flooding caused by ICL's mining activities. The government is also considering increasing the royalties ICL must pay to extract minerals from the Dead Sea.

ICL is controlled by the Ofer family through holding company Israel Corp, which owns 52.3 percent. Potash is the company's second largest shareholder.

According to Calcalist, Potash is seeking to purchase public shares, mainly those held by institutional investors in Israel and abroad. The investors were contacted by a foreign bank which did not disclose the purpose of the possible acquisition.

Wolf said he believes that longer term, the best source of the stock would be for Israel Corp to reduce part of its stake but still maintain control.

Estimates on the market are that although Potash is seeking to acquire the stock now as a financial investment, it could aim to gain control of ICL in the future, Calcalist said. If it seeks control of ICL, it will need further approval from Israeli authorities.

A number of companies have begun to either expand existing potash operations or build new potash mines due to increasing demand for the crop nutrient from China, India, Brazil and other emerging economies. Much of this development activity has been centered in the Western Canadian province of Saskatchewan, home to Potash Corp and the majority of the world's potash resources.

Potash Corp, which is already the world's largest producer of the nutrient, also owns equity interests worth billions of dollars in other fertilizer producers across the globe. Along with its rivals, Potash Corp is in the process of expanding its operations in Saskatchewan.

Analysts noted that boosting its holding in ICL would be a smart move for Potash Corp as the stock was inexpensive.

Potash Corp shares were down 27 Canadian cents at C$40.31 in early trading on the Toronto Stock Exchange on Monday. ($1=3.78 shekels) ($1=$1.04 Canadian) (Additional reporting by Steven Scheer. Editing