UPDATE 1-Vueling shares soar on Clickair merger talks

(Updates with background, share price)

MADRID, March 31 (Reuters) - Shares in Spanish low-cost airline Vueling (VULG.MC) gained strongly on Monday after its main shareholder said the company continues to hold merger talks with various parties, including Clickair.

At 1012 GMT, the stock was up 6.9 percent at 9.75 euros, bucking the main Ibex index's .IBEX 1.5 percent fall.

Trading in the shares had been suspended before the open after financial daily Cinco Dias said that Vueling and unlisted Clickair had signed a memorandum to start talks over a possible merger. Clickair is held 25 percent by national carrier Iberia IBLA.MC.

Earlier this month, Clickair managing director Alejandro Cruz said he would not rule out a merger between the two airlines.

A union would help the pair better compete against rivals easyJet (EZJ.L) and Ryanair (RYA.I). Both airlines use the same Airbus-320 planes and serve the Barcelona area.

Loss-making Vueling has been Spain's highest-profile victim of savage competition and rising fuel costs, which led to two profit warnings and a purge of senior management last year.

Top shareholder Inversiones Hemisferio has repeatedly said it was in talks with the owners of Clickair and other airlines about potential deals as part of a possible wave of consolidation in the overcrowded sector. (Reporting by Sarah Morris, Robert Hetz and Chang-Ran Kim; Editing by Paul Bolding)