UPDATE 1-China to use yuan, not dollars, for IMF bond buy

* China to use yuan to buy up to $50 billion in IMF bonds

* China had been expected to use dollars to buy the bonds (Adds details)

BEIJING, Sept 4 - China will use yuan, not dollars, to buy up to $50 billion in International Monetary Fund-issued bonds, according to an agreement between the People's Bank of China and the IMF seen by Reuters.

The expectation had been that China would use dollars to buy the bonds, which are denominated in Special Drawing Rights (SDR), the IMF's unit of account, as it seeks to diversify its vast foreign exchange holdings.

But the agreement stated that China will pay the IMF up to 341.2 billion yuan ($50 billion), also known as renminbi, for the SDR bonds, based on the Aug. 25 exchange rate.

The purchase price of each IMF bond should be paid "by transfer of the SDR equivalent amount of Chinese Renminbi to the account of the Fund", the agreement stipulated.

A Chinese central bank official, speaking on condition of anonymity, said it was not clear how the bond purchase would be implemented in practice.