BHP Billiton Ltd/Plc, the world's biggest miner, is in talks with private equity firms to team up for a possible $40 billion bid for U.S. aluminum company Alcoa Inc., the Times said on Tuesday.

The UK newspaper, citing unnamed sources close to the company, said BHP's favored partner was the Blackstone Group, which had employed Paul O'Neill, former United States Treasury Secretary and chief executive of Alcoa from 1987 to 1999, as one of its special advisers.

Sources familiar with the matter told Reuters last month that BHP had appointed investment bank Merrill Lynch to work on a possible bid for Canada's Alcan Inc, which is the subject of a $28.7 billion hostile bid from Alcoa.

The Times said Alcoa was BHP's preferred target, but it was unwilling to pay a premium for assets that it does not want to retain and so wanted to team up with a bid partner.

BHP declined to comment.

BHP, which Credit Suisse sees showing a record A$13.6 billion after tax profit in fiscal 2007, could probably manage the funding of a takeover of Alcoa Inc. and Alcoa's 60 percent-owned Alumina Ltd. (AWC.AX: Quote, Profile, Research) of Australia, according to analysts.

Newly-named chief executive Marius Kloppers, who takes over from Chip Goodyear in October, last week told analysts in Australia he will be looking for opportunistic acquisitions.

With the added benefit of strong revenues from its oil and gas assets in Europe, Australia and the Gulf of Mexico, BHP is seen able to pay cash for its share of a joint bid with Blackstone.

Blackstone has showed no signs of slowing down its buying spree, last week agreeing to pay $26 billion in cash for Hilton Hotels Corp. (HLT.N: Quote, Profile, Research)

Another potential Alcoa bidder often mentioned, Rio Tinto Ltd./Plc. RIO.AX(RIO.L: Quote, Profile, Research), is seen as more likely to employ scrip to avert a potential liquidity crunch.

Rio has refused to comment on media reports it had hired Credit Suisse and JP Morgan to explore potential acquisition targets in mining.

A takeover of Alcoa would be among the biggest deals in the sector this year, and would dwarf BHP's $7 billion-plus acquisition of WMC Resources in 2005.

Rio Tinto, which turns out nearly one million tons of aluminum via its Comalco smelters in Australia and New Zealand, last week said it would spend $1.8 billion expanding alumina-refining capacity in Australia. It also is helping fund plans to build a giant smelter in Abu Dhabi in the United Arab Emirates.

In Australian trade on Tuesday, Rio closed 0.1 percent up A$103.49, while BHP fell 1 percent to A$38.46.

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