European trader Glencore International is studying a merger with Xstrata to create a mining and trading group worth 55 billion pounds ($84.5 billion), a source close to the deal said.

Glencore is working on a potential merger with Xstrata, and both sides have hired banks as advisers, the source told Reuters, adding that a deal was not imminent and would probably be months away.

The Sunday Times reported that Glencore's advisers were discussing the details of a two-stage proposal to the Xstrata board that would see Glencore, which owns 34.4 percent of Xstrata, list in London via a reverse takeover.

It added that Glencore would then have to immediately sell down its stake in the enlarged group through a share placing, ensuring that its stake in the enlarged company did not exceed 40 percent -- something it said Xstrata has pushed for.

Speculation about a possible merger with Xstrata first surfaced in December when Glencore issued $2.2 billion in convertible bonds, one step toward a possible listing that could value it at more than $35 billion.

Glencore, the world' biggest commodity trader, said in March that an initial public offering (IPO) may be necessary to press on with expansion in a cyclical sector after it hit a liquidity squeeze during the downturn.

Glencore is in no rush whatsoever to do an IPO, a source close to the situation told Reuters on Sunday.

Commodity markets have recovered and Glencore's liquidity is comfortable, said the source, who declined to be identified. There is no urgency whatsoever.

Xstrata, whose management would retain control of the combined company if a deal went through according to the Telegraph, was valued at 33.4 bln stg as of Friday close.

Goldman Sachs is working with Xstrata on the prospective deal, with Deutsche and JP Morgan also advising, say British press reports, which add that Morgan Stanley and Citigroup are putting together Glencore's proposal.

Both companies were unavailable for comment when approached by Reuters.

(Additional reporting by Quentin Webb; Editing by Mike Nesbit)

($1=.6510 pounds)