By Ashitha Shivaprasad and Brijesh Patel

SINGAPORE (Reuters) -Vietnam could allow companies to import gold for the first time in over a decade, as it aims to bridge the widening gap between local prices and international benchmarks, an industry official told Reuters.

The Vietnam Gold Traders Association (VGTA) has been in protracted talks with the government over measures to correct the imbalance in supply and demand of gold, Huynh Trung Khanh, the association's vice chair said.

Vietnam's government virtually took full control of imports and local bullion sales in 2012, with certain large companies allowed to import the precious metal provided they repurposed it as jewellery for export.

"The government said they will start official gold imports by July or August. We hope that by July they will allow gold companies to import directly," Khanh said on the sidelines of the Asia Pacific Precious Metals conference.

He said the decision to allow companies to import gold will be subject to the final approval of the State Bank of Vietnam, the central bank.

It would mark a significant departure from the current policy, under which the central bank tightly controls imports. The State Bank of Vietnam did not respond to a request seeking comment.

Attempts to narrow the gap with international benchmarks by holding auctions and allowing four local banks to sell gold in a bid to increase liquidity have largely failed to have a sustained impact, with domestic prices still trading at stubbornly high premiums to global prices.

Immediately reducing premiums on domestic prices is crucial, as VGTA estimates Vietnam's gold demand will surge this year. The southeast nation is among the top 10 consumers of gold.

Gold purchases are set to rise 10% on a yearly basis to 33 million metric tons during the first six months of this year, Khanh said in his presentation at the conference.

Retail buyers, who view gold as a wealth preservation tool used to guard against economic uncertainty, account for a lion's share of the purchases in the south east Asian economy, home to about 100 million people.

"The key reasons for this strong retail investment demand were the sharp decrease in saving interest rates, the frozen real estate and the constant devaluation of the national currency versus the U.S. dollar," Khanh said.

"We have had people queuing in the streets, in the sun and rain to buy more gold."

A sharp surge in demand for gold has also lead to increased smuggling, especially from neighbouring Cambodia, Khanh said, adding that it made immediate policy action critical.

"It is a very big underground system network. With such a big price hike, the rate of smuggling is still high."

The VGTA and the World Gold Council, a global industry body, are currently working with the Vietnamese central bank and other government agencies to set-up a national gold exchange, a move it believes would provide more market stability.

(Reporting Ashitha Shivaprasad and Brijesh Patel in Singapore; Editing by Dave Gregorio and Neil Fullick.)