* Turkmen president approves loans - govt source
* Islamic Development Bank to lend $121.1 mln
* ADB to lend $125 mln for rail link By Marat Gurt
ASHGABAT, June 27 (Reuters) - Turkmenistan plans to borrow more than $240 million on favourable terms from the Islamic Development Bank and the Asian Development Bank for railway and water-supply projects, a government source said on Monday.
"The loans will be used to develop the Turkmen part of a rail link to Iran and for providing water to Balkan province in the west of Turkmenistan," the source told Reuters.
Turkmen President Kurbanguly Berdymukhamedov had signed a decree on acceptance of the loans, the source said on condition of anonymity.
Turkmenistan, a reclusive desert state of 5 million people bordering Iran and Afghanistan, holds the world's fourth-largest natural gas reserves.
The Saudi Arabia-based Islamic Development Bank would supply $121.1 million to Turkmenistan's Vneshekonombank to develop a water-supply project in Balkan province, repayable over 19 years with a four-year grace period, the source said.
He said the Asian Development Bank would lend $125 million to the Ministry of Rail Transport, repayable over 25 years with a five-year grace period, to fund the 311-km (194-mile) Turkmen leg of a rail corridor to link Kazakhstan and the Persian Gulf.
The Manila-based ADB approved the loan, its first ever to Turkmenistan, in March. The bank said in a statement at the time that the loan would make up 75 percent of the total project cost of $166.7 million.
The planned rail line is due for completion by September 2012. (Writing by Robin Paxton; Editing by Ramya Venugopal)