South Korean steelmaker Posco has signed a preliminary deal with Saudi Arabia's Public Investment Fund (PIF) to sell part of its construction unit for about 1.5 trillion won ($1.36 billion), Korea Economic Daily reported.

Posco signed the deal to sell a 38 per cent stake plus new shares of Posco Engineering & Construction to PIF, the newspaper said, citing investment banking sources. Posco owns almost 90 per cent of Posco E&C.

The deal is due to be finalised next month, the report added.

Posco planned to use some of the proceeds to build a joint construction firm with PIF, to help tap into the gas and oil plant market in Saudi Arabia. Merrill Lynch and JP Morgan were managing the deal.

A Posco spokesman declined to comment on the report, saying only that no final decision had been made about the sale.

Posco chairman Kwon Oh-joon said last week that the steelmaker would be able to sell a stake in Posco E&C soon, as part of its efforts to unload assets and cope with the steel market downturn.  - Reuters