* 888, Ladbrokes say talks at early stage
* Ladbrokes, 888 decline comment on level of approach
* Possible U.S. prosecution of 888 may block deal -analysts
* Sunday Telegraph reported offer at 70 pence/share
* Shares in 888 rise as much as 24 percent
By Matt Scuffham
LONDON, Dec 20 (Reuters) - Online gambling firm 888 confirmed it was in talks with Ladbrokes over a possible takeover by Britain's biggest bookmaker, sending its shares soaring by as much as 24 percent on Monday.
Shares in 888, which had lost around two-thirds of their value since January, were up 18 percent at 58 pence at 1020 GMT, having been as high as 60.75 pence.
The Sunday Telegraph reported Ladbrokes, which has 2,700 betting shops, was lining up a 70 pence-a-share bid, valuing 888 at around 240 million pounds, at a premium of some 40 percent to 888's closing price on Friday. Spokesmen for Ladbrokes and 888 declined to comment on the level of the approach and stressed talks were at an early stage.
The two held talks four years ago but these were aborted because of Ladbrokes' concerns over the threat of possible retrospective legal action in relation to 888's activities in the United States prior to the industry being outlawed in 2006.
Unlike rivals PartyGaming and Sportingbet, 888 has yet to strike a deal with U.S. authorities to give it immunity from prosecution. "This may be a barrier to a bid," said Liberum Capital analyst Richard Taylor.
Collins Stewart analyst Simon Davies said a price of 70 pence a share would be well received by 888 shareholders but also expressed concern over the spectre of U.S. litigation.
"We believe a 70-pence offer should be a slam dunk for (888) investors, but see significant regulatory risk to a successful transaction given that 888 has not procured a non-prosecution agreement with the US Department of Justice, which represents a potential poison pill."
The merger of PartyGaming and bwin, announced in August, had been expected to kick-off a wave of consolidation across an industry seen by analysts as fragmented, though 888 was expected to need a settlement with U.S. authorities before emerging as a credible candidate.
A deal would represent the first corporate activity by Ladbrokes Chief Executive Richard Glynn, who joined in April.
Analysts at Morgan Stanley said a deal would be a strategic and financial winner, matching Ladbrokes' strong sports betting book with 888's casino offering to create a combined online gambling business with annual revenue of around 350 million pounds and earnings of 85 million.
Morgan Stanley said there was potential for the companies to save 25 million pounds a year in technology, marketing and overhead costs. That would make the deal around 10 percent earnings enhancing by 2012.
In August, 888 scrapped its dividend, preferring to preserve cash after a weak economy and competition from the soccer World Cup sapped appetite for poker games and hit its first-half profit.
Shares in Ladbrokes were down 0.3 percent to 127.1 pence. ($1=.6400 pound) (Editing by Jon Loades-Carter and David Hulmes)