LONDON/PARIS - Shares in French carmakers Renault and PSA Peugeot Citroen rose sharply on Wednesday on market talk of a merger between the groups, traders said, as Renault denied the rumor.

A spokesman for PSA Peugeot Citroen declined to comment, while an analyst said a deal between the two was unlikely.

At 1110 GMT (7:10 a.m. EDT) Peugeot shares were up 7.9 percent at 14.95 euros and Renault shares were up 7.67 percent at 13.05 euros, while the CAC Paris market index was up 1.02 percent and the DJ Stoxx European autos sector index was up 2.78 percent.

PSA's announcement that it had appointed Barnaby Noble -- a former vice president of mergers and acquisitions at Alstom -- as director of strategy and business development fueled speculation, according to Credit Suisse analyst Stuart Pearson.

Pearson added that he thought a tie-up between the two groups was extremely unlikely and would not be allowed by the French state, a Renault shareholder.

It would be a pretty fast way to cut jobs in France, Pearson said.

The appointment simply means PSA is not being negligent in a period when there is a high chance of M&A activity (in the sector), said Pearson.

Industry watchers have predicted that the sector -- hit by falling sales amid a global economic slump -- will see increased consolidation as companies fight for survival.

There's a whole variety of M&A opportunities that would make more sense for PSA, Pearson added.

Renault is already linked through cross-shareholdings with Japanese alliance partner Nissan, while the French government owns a 15.01 percent stake.

Peugeot stock has gained 23 percent so far this year, while Renault is down 29 percent year-to-date and the DJ Stoxx European autos sector index is down 15 percent.

By 1106 GMT (7:06 a.m. EDT) the volume on Renault shares represented 82 percent of the stock's 90-day average daily volume, compared with 66 percent for Peugeot, and 52 percent for France's CAC 40 index.

(Reporting by Sitaraman Shankar in London, Tyler Sitte in Frankfurt and Helen Massy-Beresford and Blaise Robinson in Paris; Editing by Greg Mahlich and David Cowell)

Credit Suisse