* To combine TSE's cash-stocks and Osaka's futures strengths
* TSE is 4th-largest global bourse by trading volume
* TSE CEO says wants to list shares before any merger
* Merger seen unlikely before 2013
* Osaka shares surge 6.9 pct on news
(Updates detail on listing, share price; adds graphic link)
By Tim Kelly and Noriyuki Hirata
TOKYO, March 10 (Reuters) - The Tokyo Stock Exchange may begin merger talks with its main Japanese rival to survive sector consolidation, but any domestic union will have to wait till its shares float and is seen at least two years away.
Atsushi Saito, the chief executive of the TSE, said combining the TSE's dominant position in cash equities trading and the smaller Osaka Securities Exchange's strength in derivatives could make for a strong alliance.
"They must be feeling a sense of crisis that they will be swallowed by the wave of overseas consolidation," said Tsutomu Yamada, market analyst at Kabu.com Securities. "But I'm not sure simply creating an 'all-Japan' bourse is the answer."
The TSE is now the world's fourth-biggest exchange by trading volume, having ceded ground to Shanghai. A merger with the OSE would help save on system development and other costs, but may do little to reverse its competitive decline.
Saito said, however, the TSE was focused on listing its own shares first before any merger. "We have that responsibility to our shareholders," Saito told reporters in Tokyo, confirming earlier media reports of the planned talks.
That cautious approach appeared to contrast with the OSE, whose president was quoted earlier on Thursday as saying it would prefer a merger before the TSE floated its shares.
But, by doing so the TSE risks being caught in a back-door listing that circumvented its own rules requiring companies to show improved profitability before any IPO is sanctioned.
The TSE has suspended plans for an initial public offering several times, the last time in 2009, and on Thursday Saito declined to set a date for the next attempt saying it was up to the TSE owners, which include Morgan Stanley , Mitsubishi UFJ Financial Group and The Goldman Sachs Group .
At the earliest, a TSE official later admitted, it could take a year before the bourse was able to succeed in its next bid go public, and only then could it enter formal merger talks with the OSE. That means any union between the two Japanese exchanges may have to wait until at least 2013.
A flurry of mergers and alliances among global exchanges has put the spotlight on the TSE, which is suffering from weak trading volumes and a dearth of new listings, a reflection of the sluggish outlook for the deflation-plagued Japanese economy.
Pressure on the Tokyo bourse to act intensified last month when Deutsche Boerse unveiled a deal to acquire NYSE Euronext and create an industry giant. Singapore Exchange and London Stock Exchange are also looking to grow bigger by combining operations with Australia's ASX and Canada's TMX Group , respectively.
At the peak of Japan's asset bubble in 1989, the Tokyo exchange's market capitalisation accounted for about 40 percent of the value of global stock markets. It now contributes just 7 percent, data from the World Federation of Exchanges showed.
DIFFERENT FOCUS
Shares of the OSE surged 6.9 percent to close at 460,000 yen on the news, valuing the company at 124 billion yen ($1.5 billion).
The TSE controls more than 90 percent of cash equities in Japan, while the OSE is the leader in Nikkei futures and other derivatives, as well as the home market for video-games maker Nintendo and a handful of other major tech firms.
"Excluding a few stocks like Nintendo, the OSE does not have any appealing stocks for the cash market," said Norihiro Fujito, a senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
"If the OSE can focus on futures trade while the TSE could absorb the cash trade, there may be good synergies and they could efficiently reduce personnel levels and costs," Fujito said.
TSE's Saito has previously said that a merger with the OSE was a possibility in order to counter rising competition from overseas and to remain one of the world's major bourses.
A proposal under consideration would reorganise the two bourses' operations under a holding company, and come after an initial pubic offering by the TSE this autumn, the Nikkei business daily reported earlier on Thursday.
Last year the TSE, which abandoned its first attempt to list in 2005 after a system failure forced it to suspend trading for almost a full day, launched a new high-speed trading system to attract more business from hedge funds and other professional investors, who increasingly rely on high-speed automated trading strategies using computers.
With average daily traded value of shares at around 1.5 trillion yen ($18 billion), the TSE, founded in 1878, remains among the world's biggest bourses. Stocks traded on the exchange have a combined market value of more than 300 trillion yen.
But volumes remain listless, a reflection of the weak outlook for the world's third-largest economy, allowing the Shanghai exchange to overtake it as Asia's most active bourse .
By market value, the TSE would likely compare more closely to second-tier exchanges, analysts and bankers say, which could make it the junior partner in any attempt to combine operations with a major overseas rival.
One banker, speaking on condition of anonymity, said the TSE would likely be valued at about 200 billion yen if it listed its shares, roughly one-fourth of the market capitalisation of NYSE Euronext.
A deal by the two Japanese bourses would be an inward merger at a time when other bourses are "pursuing cross border alliances," said Koji Takeuchi, a senior economist at Mizuho Research Institute.
"Unless Japan pursues a forward-looking strategy it won't be able to avoid its market falling behind." he added. ($1=82.74 Yen) (Additional reporting by Mariko Katsumura, Ayai Tomisawa and Takeshi Yoshiike; Editing by Michael Watson and Muralikumar Anantharaman)