UPDATE 3-Japan's Lawson drops bid for am/pm Japan

* Lawson drops am/pm Japan takeover over store name dispute

* Dispute ends deal aimed at consolidating crowded sector

By Taiga Uranaka

TOKYO, May 19 (Reuters) - Lawson Inc (2651.T), Japan's second-largest convenience store chain, scrapped a plan to buy smaller rival am/pm Japan Co after a dispute over brand names, ending a bid to consolidate the overcrowded sector.

The deal would have helped Lawson catch up in store numbers with industry No.1 Seven-Eleven, a unit of Seven & I Holdings (3382.T), as Japan's convenience store chains fight for dominance in a saturated market with over 40,000 small stores spread around Japan.

The $149 million deal fell apart because the U.S. owner of the am/pm brand, am/pm International Inc. demanded that 700 stores in the combined group retain that name, a company source said. He spoke anonymously as he was not authorised to speak on the matter.

"We really wanted to complete this project. It is extremely regrettable that we were not able to reach a final agreement," said Lawson spokesman Shin Ichikawa.

Hit by weak growth due to an ageing population and mature economy, Japan's retail industry has undergone major consolidation in recent years.

Unlike department stores and supermarkets, convenience stores are enjoying relatively solid sales as thrifty consumers are spending more time at home and shopping necessities at nearby stores.

But analysts say the convenience store industry has to come up with new strategy given weak growth prospects.

Lawson shares fell 2.7 pct to 4,010 yen, underperforming a 2.8 percent rise in the benchmark Nikkei average .N225.

Lawson agreed in February to buy am/pm Japan, owned by Japanese retailing group Rex Holdings Co, in a deal that would have added about 1,100 stores to Lawson's 8,600, boosting its presence in Tokyo. [ID:nT44779]

Ichikawa confirmed that his company could not reach agreement over the brand names but would not give details.

He said his company's policy was to let its store franchisees decide which of its brands to use.

A spokeswoman for Rex Holdings declined to comment. (Additional reporting by Ritsuko Shimizu and Yumiko Nishitani in Tokyo and Amitha Rajan in Bangalore; Editing by Edwina Gibbs)