The London Stock Exchange is to buy Canada's TMX to claw back lost market share and create the world's fourth-largest bourse trading $4.1 trillion of stock a year.

Shares in the LSE, first established in 1698, jumped 9 percent as markets welcomed the all-share deal, and indicating a per share valuation for TMX of C$46.7, up 16 percent.

The deal would create the No. 1 global center of mining and energy stock trading and values the Toronto group at about $3.2 billion.

If the combination survives likely political opposition in Canada, it will create a group with a market value of 4.3 billion pounds ($6.9 billion) based on Tuesday's prices with LSE shareholders holding 55 percent and TMX shareholders getting a 6 percent premium.

The deal looks like a defensive looking merger of equals driven by competitive pressures ... and geographical constraints i.e. the need to attract more international business, said Oriel Securities in a research note.

With Xavier Rolet at the helm, the LSE is fighting to win back market share lost to upstart rivals after Europe opened markets in 2007 to challenge incumbent exchanges that had long been protected behind national boundaries.

The LSE's share of UK equity trading so far this month has been 54.9 percent, compared with 96.3 percent in February 2008, according to Thomson Reuters data, while new entrants like BATS and Chi-X are rapidly gaining clout.

The LSE expects cost savings of 35 million pounds per year from the deal and benefits to sales of the same magnitude in the third year though cross-selling, easier access for customers, and the wider availability of products.

Shareholders in TMX Group will receive 2.9963 LSE shares for each TMX share and the combined group will be headed up by Rolet from London. TMX finance chief Michael Ptasznik will be chief financial officer of the new group, based in Toronto.

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Foreign takeovers in Canada have become a sensitive political issue ever since the government blocked BHP Billiton's $39 billion bid for Potash Corp, but the LSE sounded confident it had done its homework.

There is a horde of government regulatory experts working on this. We don't want another Potash on our hands, a person familiar with the matter said.

LSE's big shareholders are backing the deal, this person said, adding that Borse Dubai, which holds 20 percent, and the Qatar Investment Authority, with 15 percent, are expected to announce their support for the deal shortly.

Bankers also said the chance of a rival bidder emerging for TMX was slim. You would need to put a cash bid on the table and a premium, which might require cuts at TMX and the Canadian regulators would not like that one bit, one banker said.

The newly created group would be the world's fourth-largest in terms of value traded -- the most meaningful benchmark in terms of revenue generated -- and the second-largest in terms of total listed market capitalization.

The deal comes as the Singapore Exchange plans a $7.8 billion acquisition of Australian stock exchange operator ASX -- another major center for mining stocks -- in a deal that has run into strong opposition in Australia.

It is also a marked change of strategy from the days when Rolet's predecessor Clara Furse spent much of her tenure -- from 2001 to 2009 -- fighting off hostile takeovers.

Deutsche Boerse, Euronext and Nasdaq all looked at acquiring the LSE, in deals that would have made it part of one of the world's top trading groups.

Shares in LSE hit their highest level since September 2008, changing hands at 977 pence in morning trade, up 9 percent on the day.

TMX also reported fourth-quarter results that fell short of expectations on Wednesday.

(Writing by Douwe Miedema; additional reporting by Victoria Howley and Sudip Kar-Gupta; Editing by Andrew Callus)

($1 = 0.6223 pound)

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