HELSINKI (Reuters) - Finland's Konecranes (>> Konecranes Abp) has agreed to buy Terex Corp's cranes business for ports and factories for 1.1 billion euros (905.73 million pound), in a move that cancels a planned full merger and allows the U.S. firm to pursue talks with a rival suitor.

Konecranes and Terex (>> Terex Corporation) agreed to an all-share merger in August, hoping a deal would help them better cope with cooling Chinese and weak European demand.

But the deal was challenged in January when Terex received a non-binding cash bid from China's Zoomlion Heavy Industries Science & Technology Co (>> Zoomlion Heavy Industry Sci & Tch Co Ltd), which later sweetened its offer to $3.4 billion.

"The agreement provides Terex with the ability to continue to pursue discussions with Zoomlion ," Terex said in a statement on Monday.

Under the new Konecranes deal, Terex will become a 25 percent shareholder in the Finnish company and Konecranes will aim for annual synergies of about 140 million euros within three years of buying Terex's Material Handling & Port Solutions (MHPS) business.

At 0935 GMT, Konecranes' shares were up 19 percent at 24.55 euros. It said the MHPS business was what had attracted it to Terex and the expected synergies were largely in line with those anticipated from a full merger.

"The Chinese intervention of course changed the picture, but if this deal goes through, I don't think it is any worse than the initial one," chief executive Panu Routila told reporters.

He said the deal would improve Konecranes' growth prospects, especially in its services business as it could help it to win larger outsourcing deals from customers.

The MHPS unit had sales of about 1.39 billion euros last year, compared with Konecranes' revenue of 2.13 billion euros.

"Both companies got what they wanted," said Inderes Equity Research analyst Juha Kinnunen, who has a "reduce" rating on Konecranes stock.

"Compared with the estimated value for the whole company, the price seems high for just one business. But it's the business Konecranes wanted, so it probably makes sense to pay a bit more."

Terex has the right to terminate the deal before the end of the month for a fee of $37 million, if the U.S. company and Zoomlion agree on a sale of Terex as a whole.

Zoomlion declined to comment on the deal or its talks with Terex.

Zoomlion's bid for Terex has sparked some national security concerns in the United States, with a Congress member noting the Chinese company's long-time association with China People's Liberation Army.

(Additional reporting by Tuomas Forsell in Helsinki and Fang Yan in Beijing; Editing by Adrian Croft and Mark Potter)

By Jussi Rosendahl