* Berlin drops TenneT Germany deal over budget strains

* TenneT seeks another buyer or IPO for German arm

* Germany could still buy minority stake - source

AMSTERDAM/BERLIN, June 20 (Reuters) - The Dutch government said on Thursday it would try to find another buyer or seek an IPO for the German arm of its state-owned electric grid company, after a sale to the German government foundered on Berlin's budget strains.

The collapse of talks is a headache for grid company TenneT, which is pursuing a 160 billion euro ($171 billion) investment plan, Europe's largest, and will hamper both countries' efforts to meet green energy targets.

In a letter to parliament, Dutch finance minister Steven van Weyenburg said German officials had told him on Wednesday that the deal for TenneT's German arm, estimated at 20-25 billion euros, would not go through.

He said he was disappointed, given Berlin had requested the deal itself in 2022 to facilitate its energy transition. TenneT is the sole grid operator in the Netherlands and the largest in Germany.

"TenneT is preparing concrete options for a private sale, or partial sale, or initial public offering of TenneT Germany," Van Weyenburg wrote.

"The German state has informed me it will support these alternative scenarios."

A German government source told Reuters a complete purchase was off the table but Berlin might still buy a minority stake.

Another source familiar with the talks said it would be difficult to find another investor large enough to buy TenneT Germany, given its size.

Higher interest rates and the growing political clout of populist parties unsympathetic to spending on renewable energy have made TenneT less attractive to potential buyers, the source said.

A deal is "hard to imagine without state involvement," the source said.

TenneT said Germany's budget problems caused the deal's failure and it intends to follow through on its huge investment plan in the coming decade, much of it needed to build the network to support wind farms in the North Sea.

Both sides said they were close to a deal in 2023 before a constitutional court verdict triggered a budget crisis in Germany.

That led Dutch Prime Minister Mark Rutte to make a personal plea to German Chancellor Olaf Scholz last month to make a bid and relieve Dutch taxpayers from funding the German grid.

Reflecting disagreement over spending plans in Germany's ruling coalition, Economy Ministry Robert Habeck said on Thursday he was unhappy the deal had failed.

Germany's heavy industry, under pressure to replace fossil fuels with renewable electricity, says transmission fees are rising because the expansion of solar and wind energy has created grid bottlenecks.

"An acceleration of grid upgrades must be given priority," VIK, a lobby group for energy-intensive German manufacturers, said in a reaction.

Georg Zachmann, an energy expert at European policy think tank Breugel, said Germany's network investments had become politicized and private investors were likely to demand a "gold plated" deal before stepping in.

"The German regulatory system is particularly prone to uncertainty, as having four (grid operators)... it will likely be changed at some point," he said.

Dutch finance minister Van Weyenburg said the Netherlands' budget for 2024 now faced a shortfall, as expected proceeds from the sale would not materialize, and the country would have to seek short and long-term refinancing for TenneT.

The Dutch government gave TenneT a 25 billion euro loan for 2024 and 2025.

TenneT has around 20 billion euros in bond debt, and in May the Dutch government estimated it needed 31 billion euros in fresh equity, 13 billion on the Dutch side and 18 billion on the German side.

($1 = 0.9331 euros) (Reporting by Toby Sterling, Rene Wagner, Emma-Victoria Farr, Benoit Overstraeten, Christoph Steitz, Alun John and Ludwig Burger; Editing by Jason Neely and Mark Potter)