SHANGHAI (Reuters) - Dairy giant Danone will buy a 25 per cent stake in Chinese milk powder maker Yashili International Holdings for US$550 million (S$702.80 million) as it looks to increase its footprint in China's fast-growing dairy sector, the French firm said on Friday.

Danone will pay HK$3.7 per share in a private placement deal. The tie-up will focus on China's infant milk formula market, set to hit US$17.8 billion this year, according to Euromonitor.

China Mengniu Dairy Co Ltd, Yashili's majority shareholder, will see its stake diluted to 51.04 per cent from 68.05 per cent, according to a company filing to the Hong Kong stock exchange on Friday.

Mengniu, in which Danone holds a near 10 per cent stake, bought Yashili in a deal worth about HK$12.5 billion last year as part of a plan to expand its milk powder business.

"We are today strengthening the winning team formed by Danone and Mengniu by acquiring an equity stake in Yashili - combining Mengniu's wide-reaching network in China with Danone's international expertise in infant milk products," Danone's CEO Emmanuel Faber said in a statement.

The deal, expected to be finalized in the coming months, still needs shareholder approval.