Japan's Fujitsu Ltd and Toshiba Corp have agreed to merge their mobile phone businesses as early as October, and they are expected to announce the deal on Thursday, the Nikkei business daily reported.

The paper said Toshiba will spin off its handset operations, and Fujitsu is expected to hold a 70-80 percent stake in the spun-off unit. The move would create the No. 2 cellphone maker in a rapidly-shrinking Japanese market.

Two sources said last week the two electronics makers were in talks to merge their cellphone businesses to share the heavy cost of developing phones in the technologically advanced market.

Fujitsu spokesman Etsuro Yamada said on Thursday that nothing had been decided. Toshiba spokesman Keisuke Ohmori said the same. They declined to comment further.

Analysts have said that the move would be a plus for Toshiba, whose cellphone operations have been losing money, but it is neutral for Fujitsu.

Fujitsu has been keeping its mobile business in the black by focusing on its strengths such as water-resistant handsets, mobile phones with fingerprint readers and phones for older people.

The companies plan to combine their development, production and sales of mobile phones in the joint venture with an eye on making a full-scale entry into Asia outside Japan and other overseas markets, the Nikkei said.

The Fujitsu-Toshiba deal, which would make them the second largest cellphone maker in the country after Sharp Corp, would come as the latest attempt by Japanese firms to team up to expand in the global market.

NEC Corp, Hitachi Ltd and Casio Computer also agreed to combine their mobile phone businesses last year and the venture started operating this month.

Despite their dominance in the domestic market, Japanese makers only have a combined share of about 3 percent worldwide, outmatched by bigger and more efficient rivals such as Nokia and Samsung Electronics.

Smartphone makers including Apple and Research In Motion are also growing rapidly in the global market.

Most local makers ship small volumes exclusively to domestic operators, in contrast to the world's largest handset producer, Nokia, which mass produces models and supplies them to vendors worldwide.

SHRINKING SALES

Cellphone sales in Japan have shrunk almost 40 percent in the last two years, driving mobile phone makers to target overseas markets and to share development costs estimated to be as much as 10 billion yen ($110 million) per new handset.

Fujitsu manufactures handsets for Japan's biggest mobile phone operator, NTT DoCoMo Inc, while Toshiba mainly supplies cell phones to KDDI Corp, Japan's No.2 telecoms firm.

Toshiba has also been selling smartphones based on Microsoft's Windows in Europe.

Fujitsu shares were flat at 587 yen, while Toshiba gained 0.8 percent to 487 yen. The Nikkei average was down 0.2 percent.

(Reporting by Sachi Izumi in Tokyo and Arnika Thakur in Bangalore; Editing by Joseph Radford)

Japan Electronics Fujitsu Smartphone