BANGKOK, June 26 (Reuters) - Thailand faces many obstacles to developing an Islamic finance market to compete for Middle East funds seeking to invest in Southeast Asian economies, officials said on Thursday.

The predominately Buddhist country, home to 6 million Muslims, still lacks a legal and regulatory framework to comply with Islamic law, Finance Ministry deputy permanent secretary Sathit Limpongpan told an Islamic finance conference in Bangkok.

"Thailand has every intention to develop an Islamic banking system, but there is a long way to go," he said.

Thailand lags far behind its Muslim majority neighbour, Malaysia, which accounts for about two-thirds of global issues of Islamic bonds, called sukuk.

Islamic bonds do not pay interest, which is banned as usury under Islamic law, and are structured as profit-sharing or rental agreements underpinned by physical assets.

Sathit said a working group was studying ways to adapt Thailand's financial reporting, accounting and tax systems. Another goal was to develop a secondary market.

"We are still at an early stage, but we can benefit from the experience of those who have travelled the path ahead of us," Sathit said, noting Malaysia's expertise in Islamic fund management and insurance.

The value of assets currently under Islamic finance is estimated at $1 trillion and growing at an estimated rate of 10-15 percent a year, according to the Asian Development Bank.

Thailand had planned to issue its first $500 million Islamic sovereign bonds this year, but scrapped the plan because more preparation was needed, Pongpanu Svetarunda, chief of the ministry's Public Debt Management unit, said.

"We still need to fix several issues, which is not easy and is expected to take six months. We should see a bond issue in the next fiscal year, but we have not decided the amount yet," he told reporters.

"Initially, we believe sukuk bonds should be done by state enterprises because it's more difficult to do a sovereign bond," he said, adding that Thailand's state-run airline and power utility were keen to issue such bonds.

Thailand is among other Asian countries wanting to tap the growing market to raise cheaper funds to finance its infrastructure projects -- including electricity, road extensions and mass transportation -- on which the government plans to spend 1.6-1.8 trillion baht ($48-54 billion) between 2008 and 2011.

Singapore and Hong Kong, leading Asian centres for conventional private banking and fund management, are adapting their financial systems.

Hong Kong is considering scrapping a stamp duty on Islamic finance structures to avoid double taxation. Singapore is soon to launch new guidelines for sukuk. ($1=33.55 Baht) (Additional reporting by Arada Therdthammkun; Editing by Malcolm Whittaker)