Toyota Motor Corp and Mazda Motor Corp are in talks over the possibility of Toyota supplying core components for hybrid vehicles to its smaller rival, two sources familiar with the matter said on Thursday.

One of the sources, who asked not to be identified because the talks are confidential, said any decision was likely to take some time to finalize, adding that the discussions could ultimately end with no deal.

The Nikkei business daily reported on Thursday that the two Japanese automakers were in the final stages of discussion, and that plans for Toyota to supply core hybrid components to Mazda were likely to be announced soon.

The report sent Mazda's shares soaring 12.4 percent in early trade as the popularity of gasoline-electric cars surges in Japan thanks to tax incentives.

Toyota and Mazda declined to comment on whether they were holding such talks, denying a decision had been made.

The Nikkei said that under the deal, Toyota would supply batteries, motors, control units, and other components made by group parts makers to Mazda, boosting economies of scale and revenue. Denso Corp and Aisin Seiki Co are among Toyota's key hybrid suppliers.

The paper said the components will be used in a hybrid vehicle Mazda is planning to launch as early as 2013, with a sales target of some 100,000 units a year. That would be equivalent to about 8 percent of Mazda's total sales last year.

Such a move would mark a shift in strategy for Mazda, which repeated on Thursday it still aimed to raise fuel economy with improvements to internal combustion engines until 2015.

Toyota's shares were up 1.4 percent in afternoon trade, mirroring a rise in other auto stocks and the broader Tokyo market. Mazda was up 6.6 percent.

MORE HYBRID DEALS TO COME?

Toyota, a pioneer in hybrid technology with at least a 10-year lead on most rivals, currently supplies its hybrid system to Nissan Motor Co, which uses it in its Altima hybrid sedan for the U.S. market, although those sales are negligible.

With the launch of two relatively low-cost hybrid cars this year -- Toyota's third-generation Prius and Honda Motor Co's Insight -- analysts have said the bar for developing competitive gasoline-electric cars has risen.

That has raised the possibility that rivals would seek supply deals from the front-runners or through other forms of collaboration, analysts say.

Technology that meets environmental regulations comes in a variety of flavors, and we suspect that very few automakers have the wherewithal to develop all of them, JPMorgan analyst Kohei Takahashi wrote in a note to clients.

Given this, we expect an increasing number of automakers to employ Toyota's series/parallel (hybrid) technology for its proven low costs and high reliability, with Toyota suppliers selling them the core components. Mazda, affiliated with Ford Motor, has said it is considering various options for hybrid technology, including outsourcing its development instead of developing it on its own or with Ford.

Mazda has one hybrid model, the Tribute SUV, which is produced by Ford using technology partially licensed from Toyota. The model is only sold in California.

Mazda's research and development chief Seita Kanai said earlier this year that Mazda expected to start mounting electric devices such as motors for hybrids from 2015 at the earliest.

But the pressure to offer hybrid models has grown in Japan as consumers flock to gasoline-electric vehicles, which receive the biggest tax breaks under a government initiative that started in April to spur sales of cleaner cars.

(Additional reporting by Nobuhiro Kubo, Nathan Layne and Yumiko Nishitani; Editing by Chris Gallagher)

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