UPDATE 2-Isuzu says not considering equity tie with Volkswagen

* Isuzu repeats considering wide-ranging options for cooperation

* Isuzu, VW to sign confidentiality agreement soon -Nikkei

* Isuzu shares up 1.8 pct, bucks fall in Tokyo market (Updates with Isuzu comment)

TOKYO, April 22 (Reuters) - Japan's Isuzu Motors Ltd is in talks with Volkswagen AG on a truck engine supply deal, the Nikkei business daily said on Friday, but the Japanese truck maker denied that the two were considering an equity tie-up.

The two firms will soon sign a confidentiality agreement and start full-scale talks, aiming to close a deal this autumn, the paper said.

Isuzu, Japan's top maker of small trucks, neither confirmed nor denied that it was in talks with Volkswagen on cooperation in engine supply and technology, but repeated an earlier statement that it continued to consider a wide range of options on operational cooperation.

Shares in Isuzu rose 1.8 percent to 340 yen in morning trade, outperforming a 0.5 percent fall in the Tokyo market's benchmark Nikkei average .

The Nikkei newspaper said Isuzu would supply seven-litre-class diesel engines for midsize trucks and three-litre-class diesel engines for commercial vans and small trucks produced by the Volkswagen group.

In return, Volkswagen will supply engine control and body safety technologies used in its passenger cars for Isuzu's next generation pickup trucks, the paper said.

This exchange will help Volkswagen to cut costs and lower prices, crucial for boosting market share in emerging countries, the Nikkei added.

Through the tie-up, Volkswagen plans to compete better with global segment leader Daimler AG , the business daily said.

It added that the two would consider acquiring stakes in each other, depending on how negotiations go.

Earlier this month, Volkswagen said a decision on a possible stake in Isuzu was currently not on the agenda after a German magazine reported that it was considering buying all or part of the Japanese truck maker. [ID:nLDE73C1GJ]

The Volkswagen group, including MAN SE and Sweden's Scania AB , sold roughly 113,000 midsize and large trucks in 2009. The figure would rise to about 145,000 units if Isuzu's sales are added, the Nikkei said. (Reporting by Chang-Ran Kim in Tokyo, Aniket Basu in Bangalore; Editing by Edmund Klamann)