STOCKHOLM, Nov 26 (Reuters) - Sweden said on Wednesday it had granted green steel startup Stegra 390 million crowns ($41 million) in funding, as the Swedish company gathers new financing to complete its factory in the north of the country.

"The project has good potential to accelerate the transition in the iron and steel industry," the Swedish Energy Agency said in a statement.

The authority said the support would increase Stegra's chances of securing the additional capital it needs.

Stegra, which last year said it had secured loans and equity worth 6.5 billion euros ($7.5 billion), announced in October that it was working on raising up to $1.1 billion in additional funding to finish a plant that will use hydrogen made on-site from renewable electricity in its production.

"The support to Stegra is conditional on the company being able to demonstrate, by spring 2026 at the latest, that they have managed to secure sufficient capital to complete the project," the energy agency added.

Sweden has led Europe's efforts to shift from fossil fuel-based industries to non-polluting energy, driven by cheap, carbon-free electricity, but its green transition also faces headwinds, such as the bankruptcy of battery maker Northvolt.

Stegra's CEO Henrik Henriksson said this month that the company had secured around half of the funds it needs and that he expected the rest to come from banks within six months.

Extra cash from the government would send a strong signal to banks and investors that Sweden backed the project, he added.

STEGRA SAYS IT CAN NOW TAKE 'NEXT STEP'

Stegra received 1.2 billion crowns as part of a package of support agreed between Sweden and the European Union. But an additional 1.6 billion of the package was withheld. Stegra applied again to the energy agency to get this money, but has only received part of the total.

"Although there is a gap to what the government requested and received EU approval for, we can now take the next step together with the financiers," said Stegra in written comments to Reuters on Wednesday.

"This levels the playing field somewhat in relation to other projects in Sweden and the rest of Europe."