Japan's Toshiba Corp is in talks with Shaw Group over the U.S. company's 20 percent stake in nuclear power plant company Westinghouse Electric Co, a person familiar with the matter said.

Shares of Toshiba fell more than 7 percent to 2-1/2-year lows on Tuesday on concerns the chipmaker would be saddled with costs of buying additional shares it agreed in principle to acquire five years ago, before Japan's worst nuclear disaster put a chill on global demand for new reactors.

Shaw wants Toshiba to buy the stake, the source, who did not wish to be identified because of the sensitivity of the matter, told Reuters. Something may be decided within a month, the source added.

Shaw partnered with Toshiba and Japanese engineering firm IHI Corp to buy Westinghouse from British Nuclear Fuels PLC for $5.4 billion in 2006. Toshiba bought 77 percent, Shaw purchased 20 percent, and IHI took 3 percent.

Toshiba's stake in Westinghouse fell to 67 percent after the company sold part of the stake to Kazakhstan's state-owned nuclear power company Kazatomprom.

The Wall Street Journal reported earlier that Toshiba is in talks to buy out Shaw's Westinghouse stake first, adding that a deal could be announced as early as Tuesday but that discussions are still ongoing and could fall apart.

The Nikkei business daily reported that the price tag for the deal could be at least 100 billion yen ($1.3 billion).

The company (Toshiba) is not cash-rich, so investors are concerned that it may have to go through equity financing if it decides to buy the stake, said Makoto Kikuchi, chief executive of Myojo Asset Management.

A Tokyo-based spokesman for Toshiba declined to comment on the report. Officials at Westinghouse were not immediately available for comment. Shaw declined to comment.

OPTION TO SELL STAKE

Shaw has an option under the original deal to sell the Westinghouse stake to Toshiba. That option expires in February 2013.

The talks on the fate of the stake are also taking place at a time when nuclear energy strategy has been reviewed globally after Japan's nuclear power plants were severely damaged by the earthquake and tsunami that hit the nation's northeastern coast in March, spreading radioactive materials.

Founded in 1886, Westinghouse pioneered long-distance and high-voltage power transmission. It also built the reactors for the world's first nuclear submarine and nuclear aircraft carrier.

The stake in Westinghouse generated $24 million in cash for Shaw every year through the dividend payments, or a 2.2 percent dividend yield.

Toshiba, the world's No.2 maker of flash memory chips, has been under pressure to trim its non-core operations as it steels itself for quake-hit demand in Japan.

The company reported in July an 88 percent fall in its quarterly operating profit, blaming a slide in chip prices.

For Toshiba, this (additional stake purchase) will be a burden. They will have to divert resources they would probably want to deploy elsewhere. said Damian Thong, Macquarie Capital analyst.

I don't think it's such a big problem for Toshiba to borrow money to do this, but it's still an additional burden, he added.

Toshiba shares ended down 5.1 percent on Tuesday after dropping as much as 7.3 percent. Volume was heavy, with 82.3 million shares changing hands compared with the 90-day average volume of 34.4 million. Japan's main stock index was down 2.2 percent. ($1 = 76.970 Japanese Yen)

(Additional reporting by Ayai Tomisawa and Mayumi Negishi in TOKYO, Megan Davies in NEW YORK, Writing by Junko Fujita; Editing by Muralikumar Anantharaman)

Japan Manufacturing