JAKARTA (Reuters) - Indonesia's Krakatau Steel and South Korea's POSCO Holdings have agreed to invest $3.5 billion to expand their production capacity in the Southeast Asian country, the companies said on Thursday.

Under the deal, the companies agreed to increase production capacity of KRAKATAU POSCO to 10 million tonnes per year for upstream and downstream products, Krakatau said in a statement.

The expansion will start next year and include the production of automotive steel for electric vehicles (EVs), the Indonesian Investment Ministry said in a separate statement about the deal.

KRAKATAU POSCO's current output capacity is 3 million tonnes.

"PT KRAKATAU POSCO will be the biggest integrated steel company in Southeast Asia," Krakatau Steel chief executive Silmy Karim said in the statement.

The agreement was signed in Seoul, during the last leg of a trip by Indonesian President Joko Widodo that included stops in China and Japan.

Indonesia also announced investment pledges by companies like Japan's Toyota Motor Corp and Sojitz Corp earlier this week.

KRAKATAU POSCO has invested $3.7 billion in steel production in Indonesia since 2010, the Investment Ministry said.

POSCO is also involved in a $9.8 billion project to create an EV supply chain in Indonesia, to make use of the country's rich nickel reserves. That project is led by another South Korean company, LG Energy Solution (LGES).

The ministry said the latest agreement will also help facilitate Indonesia's $32 billion project to relocate its capital from Jakarta to a new city called Nusantara on Borneo island.

(Reporting by Bernadette Christina Munthe and Gayatri Suroyo in Jakarta and Joyce Lee in Seoul; Editing by Ed Davies and Kanupriya Kapoor)