Japanese chipmaker Elpida Memory Inc will start tie-up talks next month with Taiwanese rival Nanya Technology Corp, with a view to a possible merger, the Nikkei business daily said on Thursday.

The idea comes as part of Elpida's plan to create a Japan-Taiwan chipmakers' alliance to help the No. 3 player compete against South Korean giants, as makers of DRAM chips suffer from slack demand for PCs, the paper said.

Combined, the two companies would have a 19.3 percent share of the Dynamic Random Access Memory market, compared with Samsung Electronics at 41.6 percent and Hynix Semiconductor at 23.4 percent, the Nikkei said.

Elpida issued a statement saying the report was not based on a company announcement, adding that it was considering various financing options, including refinancing debt and having clients pay for orders in advance.

Nanya's chairman said the two firms were not in talks on cooperation.

Shares in Elpida leaped more than 6 percent in early trading following the report, but dropped back later.

The two makers of DRAM chips, used in personal computers, have been suffering amid the rise of tablets and the poor economic environment, especially in Europe.

Prices for DDR3 DRAMs have plunged about 80 percent since April 2010, the business daily said.

Elpida posted an operating loss of 44.7 billion yen ($573 million) for July September, while the Nikkei said Nanya has posted losses for seven straight quarters.

The two firms will discuss proposals including the creation of a holding company under which the two firms would operate, the paper said.

The arrangement would involve introducing the Japanese firm's technologies at Nanya's production facilities, while development would be done mostly in Japan, the Nikkei said.

($1 = 77.9750 Japanese yen)

(Reporting by Isabel Reynolds; Editing by Joseph Radford)

Japan