Private equity firm Blackstone Group is talking to lenders about cutting up to $5 billion of debt held by its Hilton Hotels chain, a source familiar with the situation said on Wednesday.

The $26 billion deal to buy Hilton was struck at the peak of the buyout bubble in July 2007 and was financed with $20.6 billion of debt and about $5.7 billion of equity. Since then, the hotel market has suffered from the economic crisis as consumers and businesses have cut back on travel spending.

Blackstone is weighing injecting $800 million of fresh equity, which would be used to buy back debt at a discount, said the source, who requested anonymity because the talks are not public. The private equity firm is also trying to extend the debt maturity by three years to 2016.

The Wall Street Journal earlier reported the details.

Blackstone declined to comment.

Shares of publicly listed rival Marriott Hotels fell 3.4 percent to $25.03 on Wednesday. The hotel chain's stock is up nearly 30 percent this year, but down about 26 percent from the beginning of 2008.

Blackstone's shares were 5.9 percent lower at $13.54.

The private equity firm wrote down its investment in Hilton by nearly half at the end of 2008, documents previously obtained by Reuters showed.

Blackstone's equity investment in the Hilton deal, held in its fifth buyout fund, BCP V, was $1.45 billion, according to the documents. It was marked as having unrealized value of $742 million at the end of 2008, or 51 percent of cost.

(Reporting by Megan Davies in New York and Sakthi Prasad in Bangalore; Editing by Lisa Von Ahn)

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