(Reuters) -- Japan's Renesas Electronics Corp, Fujitsu Ltd and Panasonic Corp have begun discussions toward integrating their system chip operations, the Nikkei business daily said.

As a first step, the three will spin off their system chip design and development divisions to create a new company, the paper said.

The move is aimed at creating a globally competitive chip maker, which will play an essential role in the survival of the chip industry, leaving Toshiba Corp as the only other Japanese player, the paper said.

The new company will develop system chips, which serve as the brain for electronic devices and automobiles, by using its parent companies' proficiency in image processing, telecommunications and other technologies, the business daily reported.

The three companies are expected to hammer out a basic agreement by the end of March with an aim to create the company by the end of 2012. The project is likely to receive substantial capital from government-backed investment fund Innovation Network Corp or INCJ, the Nikkei said.

Japanese chipmakers have been suffering losses partly due to a failure to garner enough investment to produce advanced chips and partly because the business deals with small-lot orders for a wide variety of chips, the daily said.

(Reporting by Sunayan Bhattacharjee in Bangalore)

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