Starbucks Corp and Green Mountain Coffee Roasters are in partnership negotiations, a source close to the talks told Reuters on Monday, sending Green Mountain shares to a lifetime high.

Starbucks, the world's biggest coffee chain, has been looking for growth beyond its namesake cafes and wants to be a big player in the new and fast-growing single-serve coffee segment. Green Mountain dominates the U.S. single-cup market with its Keurig brewer.

Starbucks said on Sunday that it planned to announce a new product for the single-cup coffee market in the near future, reviving speculation of a tie-up between the two companies.

The person close to the partnership talks would not say if the pending announcement would involve Green Mountain, and declined to describe the type of partnership that Starbucks and Green Mountain were exploring.

A Starbucks spokesman declined comment on the negotiations. Before news of the talks, Green Mountain spokeswoman Suzanne DuLong said the company had no comment on speculation around potential partnerships.

Starbucks is preparing for the March 1 termination of an agreement by which it provides coffee discs for Kraft Foods Inc's Tassimo one-cup home brewer. Starbucks is also ending its grocery distribution agreement with Kraft.

On Sunday, Starbucks said it wanted to keep all its single-serve options open, including partnerships with other companies, extensions to its Via instant coffee line or even selling single-cup brewing machines.

Green Mountain shares surged as much as 13.5 percent to a new high of $47.81 before backtracking. The shares, briefly halted after Reuters reported the talks, closed up 6.7 percent at $46.35.

The company is based in Vermont, which is known as the Green Mountain state. It expanded rapidly through acquisitions, and now trades at about 36 times forward earnings, versus the food processing sector's average of 19.

Shares of Starbucks closed up 0.7 percent at $33.58.

IRRESISTIBLE OPPORTUNITY

Green Mountain's Keurig enjoys a near monopoly in the U.S. single-cup coffee sector, with more than 80 percent market share, and has hammered rivals including Kraft's Tassimo machine, Sara Lee's Senseo brewer and Nestle SA's Nespresso system.

In Europe, which is dominated by automated espresso machines, Nestle is the market leader.

In 2010, Green Mountain said Keurig-related revenue, including sales of machines and its K-cup coffee pods, was $1.19 billion, or 88 percent of the company's annual sales.

Canaccord Genuity analyst Scott Van Winkle said he expects that U.S. sales in the single-serve coffee category will approach $4 billion in 2011, including brewing machines and coffee pods.

Keurig is the dominant brand in single-serve coffee with rapidly rising consumer adoption of its brewers seeding a market opportunity that Starbucks can't resist, he said.

JPMorgan analyst John Ivankoe wrote in a December note to clients that a single-cup product could easily be a $1 billion revenue opportunity for Starbucks in the United States alone.

Many U.S. office workers are familiar with Keurig because the machines, which allow users to choose from a variety of coffee and tea, are a common fixture in company break rooms.

That's what gives them the big advantage. It gives them a lot of name recognition, said Richard Haffner, head of global beverage research at Euromonitor.

Euromonitor tracks sales of single-serve coffee pods in 52 countries around the world. Haffner said sales in the United States accounted for $600 million of 2010 global sales of $4.3 billion. Machine sales are not included in those figures.

Coffee culture in the United States revolves around the multi-serving coffee pot, and Haffner said the real test is whether consumers will want to pay more money to move to a single-cup brewer, which offers more convenience and variety.

(Additional reporting by Nichola Groom in Los Angeles)

(Editing by Bernard Orr and Edwin Chan)

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