CIT Group Inc shares surged on Tuesday following a newspaper report that hedge fund Paulson & Co wants to combine the cash-strapped lender with a Paulson-affiliated bank once known as IndyMac. But a person familiar with the matter denied the report.

The New York Post, citing unnamed sources, said a number of CIT creditors, including Paulson, were considering several scenarios, including merging the struggling finance company into IndyMac, now called OneWest Bank.

One source familiar with the situation dismissed the talk: There is absolutely no relations between IndyMac and CIT. Linking the two companies is just wrong.

Paulson declined to comment on the matter. CIT did not immediately return a call seeking comment.

CIT shares were up 19 cents, or 11 percent, to $1.86 in midday trading on the New York Stock Exchange.

Currently, CIT is scrambling to line up new financing and restructure its balance sheet as billions of dollars in debt comes due over the next year.

The lender, which relies on debt sales to fund its business, has been fighting for survival since the credit crunch shut down capital markets in 2007. Crumbling mortgage markets fueled losses, while its weakened condition has slowed its lending business to a crawl.

In July CIT creditors extended $3 billion in loans, though the company's advisers continue to seek a more comprehensive restructuring to avoid bankruptcy.

Paulson, led by billionaire investor John Paulson, was part of a consortium that purchased failed mortgage lender IndyMac from the Federal Deposit Insurance Corp earlier this year.

Paulson has been closely watched by investors since it reaped windfall gains betting that U.S. mortgage markets would collapse in 2007. It also correctly forecast that financial services companies would tumble last year.

Before its setbacks, CIT was one of the largest lenders to small and mid-sized businesses in the United States.

(Reporting by Joseph Giannone and Paritosh Bansal in New York; additional reporting by Biswarup Gooptu in Bangalore; Editing by Will Waterman and John Wallace)

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