* Says it did not hire banks to value TI Media unit
* Any operation would be politically sensitive
* TI Media shares up 2.7 percent, outpacing sector (Adds details, shares)
MILAN, Dec 7 (Reuters) - Telecom Italia denied on Tuesday a newspaper report about a possible sale of television division Telecom Italia Media that lifted the unit's shares to a four-week high.
Daily la Repubblica said the telecoms group was studying the possibility of selling the unit or a stake of at least 20 percent, as it seeks to cut debt.
Options include merging loss-making TI Media with recapitalised terrestrial pay-TV operator Dahlia TV ahead of a possible sale, the newspaper said.
"Telecom Italia denies it has hired banks to add value to Telecom Italia Media," a spokesman said.
Telecom Italia has a 77 percent stake in the 350 million euro company.
Any deal would be politically sensitive as it would change the balance in Italy's television market, dominated by state-owned RAI, Prime Minister Silvio Berlusconi's Mediaset and News Corp unit Sky Italia.
Shares in TI Media hit a four-week high then pared gains to be up 2.7 percent at 0.244 euros by 1436 GMT. The Stoxx 600 European media sector index was up 1.1 percent.
(Reporting by Stefano Rebaudo; Writing by Danilo Masoni; Editing by Erica Billingham)