By Yuka Obayashi and Yousef Saba

TOKYO/DUBAI (Reuters) -Saudi Aramco will buy from Japan's Sumitomo Chemical a 22.5% stake in their petrochemical joint venture Petro Rabigh for $702 million, the companies said on Wednesday, as part of a turnaround plan for the loss-making venture.

Under the deal, Aramco and Sumitomo Chemical will each provide $702 million in funding to Petro Rabigh and waive loans worth a total $1.5 billion, they said.

Petro Rabigh had racked up 8.871 billion riyals ($2.36 billion) of accumulated losses by the end of June, equivalent to over 53% of its share capital, it said on Wednesday.

The Aramco-Sumitomo deal marks a turnaround effort as Petro Rabigh looks to abide by Saudi law, which says that if a joint-stock company's losses are half its issued capital, it must make recommendations to address them within 60 days.

An extraordinary general meeting must also be called within 180 days to either take steps to resolve the losses or dissolve the company.

The deal shrinks Sumitomo Chemical's stake in the venture to 15%, while increasing Aramco's share to 60%. The remaining 25% is owned by stock market investors.

Petro Rabigh said in a second-quarter results filing that its accumulated losses were mainly due to "unfavorable market conditions which resulted in lower or negative margins of the refined and petrochemical products", as well as higher finance costs due to an increase in interest rates.

The deal aligns with Aramco's expansion in downstream markets such as refining, and Sumitomo Chemical's move away from commodity chemicals toward speciality chemicals, they added.

"While we had decided not to increase our exposure to Petro Rabigh, we came up with the idea to cash our stake and inject the cash to the JV," Sumitomo Chemical President Keiichi Iwata told reporters.

"We believe this scheme was the best option."

Asked if his company might further reduce its stake in Petro Rabigh, Iwata said: "No such plan at present."

Sumitomo Chemical plans to book a pretax loss of 27 billion yen ($183 million) in the July-September quarter as a result of the deal, but is sticking to its annual profit forecast announced in April, the company said.

($1 = 147.5000 yen)

($1 = 3.7545 riyals)

(Reporting by Yuka Obayashi in Tokyo and Yousef Saba in Dubai; Editing by Miral Fahmy and Mark Potter)