Adds Thames Water's response in paragraph 3

Jan 31 (Reuters) - Britain's Thames Water is edging closer to a 16 billion-pound ($22 billion) rescue deal with its lenders that would keep the ailing utility out of temporary public ownership, Sky News reported on Saturday.

A group of creditors holding 13 billion pounds of Thames Water's total debt of 20 billion pounds is aiming to sign an in-principle agreement with regulator Ofwat and the company by the middle of next month, the report said.

"We are working constructively with stakeholders to deliver a market-led recapitalisation" Thames Water said in an emailed statement to Reuters, adding that they remained hopeful of reaching an agreement.

The company, which has 16 million customers, has been at the centre of an environmental scandal in Britain in which it has been fined more than 100 million pounds for sewage spills. Its debt burden has also pushed it close to collapse.

Ofwat told Reuters it is continuing to engage with the London & Valley Water investor group and is reviewing its proposals to assess whether they would improve the company's operations and strengthen its finances.

London & Valley Water is a creditor group comprising 15 institutions including Aberdeen Investments, Elliott Management, PIMCO and Silver Point Capital who have pledged to retain their ownership in the struggling utility until 2030 as part of a rescue plan.

Under the proposal being discussed, lenders would take a haircut of up to 30% on the Class A debt they are owed, an increase from the 25% disclosed in an announcement in October, according to the report.

More than 13 billion pounds of existing value is expected to be written off when a final deal is put to participating investors, which include Assured Guaranty, Invesco, Elliott Management, Silver Point Capital and Farallon Capital Management, the report said.

In exchange, creditors would receive a minimum 10% equity stake in the recapitalised company, the report added.

An outline agreement is expected as early as the week after next, with terms to be submitted for a Downing Street review in the coming weeks, the report said.

Last year, Thames Water secured court approval for a 3 billion-pound debt lifeline, averting collapse and a state rescue.

In December, Britain's biggest water supplier started to take the steps needed to book court dates and proceed with a recapitalisation plan led by senior lenders, as soon as they agree terms with the government on a deal.

($1 = 0.7306 pounds)

(Reporting by Nilutpal Timsina and Rajveer Singh Pardesi and Anusha Shah in Bengaluru; Editing by Sharon Singleton)

((Nilutpal.Timsina@tr.com; +91 86382 04706;))