Japanese brewer Kirin Holdings Co and smaller unlisted rival Suntory Holdings Ltd are in talks to merge and create one of the world's largest beverage and food firms, the Nikkei business daily reported on Monday.

Kirin and Suntory are in talks to merge under a holding company with the aim of strengthening their operations in the mature Japanese market and accelerate expansion into growing overseas markets, the Nikkei said.

The two aim to agree on the deal this year, the newspaper said citing unnamed sources.

Kirin said in a statement that while it has been working with Suntory on procurement, distribution and other business activities it was not true the two had decided on a merger as outlined by the newspaper report.

When asked whether the two were in talks on a merger, Kirin spokesman Yoshiki Yamashita said he could not comment.

Suntory spokeswoman Naoko Tsuda said she was checking on the report and could not immediately comment.

The merged firm would be the largest player in the Japanese beer and soft drink markets, and one of the biggest globally, with combined annual sales last year of 3.82 trillion yen ($41 billion), the Nikkei said.

That would put it on par in revenue terms with U.S.-based Kraft Foods and Pepsico Inc .

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 agreed to a $2.5 billion buy-out of Australian brewer Lion Nathan , the latest in a series of deals by the maker of Lager Beer.

Last year Suntory outmaneuvered both Kirin and Asahi Breweries Ltd <2052.T> 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.

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 Nikkei said.

The combined market share for beer products in Japan would have been roughly 50 percent last year, putting them well ahead of Asahi Breweries at about 38 percent, the paper said.

(Editing by Chris Gallagher)