Japanese brewer Suntory Holdings Ltd said on Monday it was considering a merger with larger rival Kirin Holdings Co <2503.T> in a deal that would create one of the world's largest beverage and food firms.

The news sent shares of Kirin soaring 7.8 percent to a nine-month high and lifted shares of other brewers amid speculation that a deal would trigger consolidation in the sector.

A merger would put Kirin and unlisted Suntory on par in revenue terms with U.S.-based Kraft Foods and Pepsico Inc , and give the two more pricing power in Japan's mature market.

If a merger is realized, that would give them the market share to take leadership in pricing and help their soft drinks businesses -- a chronic weak spot in an ultra-competitive market, in Japan, said JP Morgan analyst Naomi Takagi.

It's a huge positive if they can do it.

Suntory spokeswoman Naoko Tsuda said that the company was considering various options including a merger with Kirin but that nothing had been decided.

Kirin spokesman Mitsutake Matano declined comment on the possibility of a merger, repeating a statement that Kirin is working with Suntory on procurement, distribution and other business activities.

Kirin and Suntory are in talks to merge under a holding company, and aim to agree on the deal this year, the Nikkei business daily said, citing unidentified sources.

The merged firm would be the largest player in the Japanese beer and soft drink markets with combined annual sales of 3.8 trillion yen ($41 billion), giving them more resources to seek acquisitions abroad.

Kirin and Suntory together controlled 31.4 percent of Japan's soft drink market in 2008, narrowly edging out Coca-Cola Co's 29.4 percent share, according to the Nikkei.

Some analysts cautioned that a deal was by no means a sure thing, citing potential regulatory resistance to a merged entity that would command about half of Japan's beer market.

It is not at all certain that a deal is really going to happen. The hurdles ahead are by no means small, said Mizuho Securities analyst Hiroshi Saji.

Shares of Kirin rose 7.8 percent to 1,392 yen while the Nikkei benchmark average <.N225> slid 2.6 percent lower. Sapporo Holdings <2501.T> surged 6.1 percent to 536 yen, and Asahi Breweries <2502.T> climbed 2.5 percent to 1,395 yen.

If the deal does get regulatory approval, Kirin would comfortably nudge out Asahi Breweries's 37 percent market share. It would also capture Suntory's health and soft drink businesses in southeast Asia and in China, Mizuho's Saji said.

I don't think Asahi or Sapporo are going to stand idly by, he said.

The Nikkei said Kirin Holdings President Kazuyasu Kato and Suntory Holdings President Nobutada Saji met at the end of last year to initiate talks and they had informed some of their executives of the merger plan by early July.

The two sides will ask for feedback from Japan's anti-trust regulator as early as this week, it said.

Japan's beer market has shrunk by 15 percent in terms of shipment volumes over the past decade, forcing the industry to slash costs and look overseas for growth.

Earlier this year Kirin, which held 37.5 percent of Japan's beer market in January-June, agreed to a $2.5 billion buy-out of Australian brewer Lion Nathan , bringing the total that the maker of Kirin Lager Beer has spent on acquisitions to 968.5 billion yen over the past three years.

Last year Suntory, which is almost wholly owned by its founding family, outmaneuvered both Kirin and Asahi with a more than 600 million euro ($836 million) deal for Danone's Frucor juice unit and said it was ready to spend another $2 billion or so on acquisitions.

($1=92.48 Yen)

($1=.7178 Euro)

(Additional reporting by Ritsuko Shimizu; Editing by Edwina Gibbs)

Japan Nikkei 225