Aug 18 (Reuters) - Australia's no.2 casino operator Star Entertainment Group Ltd said on Wednesday it would negotiate with the New South Wales government to increase the number of gaming machines permitted at its Sydney casino.

The move comes at a time when larger rival Crown Resorts Ltd is facing an uncertain future for its flagship Sydney operations amid allegations of money laundering and governance failures.

Earlier this year, an industry regulator said that Crown was unsuitable to hold a gambling licence for its Sydney resort unless it made sweeping changes to its board and culture.

In a brief statement, Star said its Sydney casino was currently permitted to operate 1,500 gaming machines, arguing it was well below the number permitted at Crown's casinos in Perth and Melbourne.

It added that negotiations with the New South Wales government were expected to commence shortly.

Last month, Star withdrew a A$9 billion ($6.53 billion) buyout proposal for Crown.

($1 = 1.3782 Australian dollars) (Reporting by Indranil Sarkar in Bengaluru; Editing by Rashmi Aich)