UPDATE 1-China Eastern, Shanghai Air in merger talks-paper

(Adds analyst comment, background)

SHANGHAI/HONG KONG, June 8 (Reuters) - Shares of China Eastern Airlines (600115.SS)(0670.HK) and smaller Shanghai Airlines 600591.SS were suspended on Monday after media said the two loss-making carriers were close to a merger deal.

Shanghai Air Vice President Feng Xin told the South China Morning Post the two Shanghai-based carriers got instruction from the government to consolidate their assets.

Feng did not provide further details for the highly anticipated move that would give the combined carriers more than half of the market share in Shanghai, a fiercely-competitive city among domestic and foreign carriers.

Shanghai Air board secretary Xu Junmin said he was not aware of any imminent merger with China Eastern. China Eastern executives declined to comment but said the carrier would issue a statement later in the day to clarify the situation.

"I am not saying that merger is a cure-all, but at least it gives them a chance to work together rather than fighting with each other especially at a time like this," said Li Lei, an analyst with China Securities Co.

After years of double-digit growth, China's airlines are facing strong headwinds as the global financial crisis strikes home. China's top three carriers, including Air China (601111.SS) (0753.HK) and China Southern Airlines (600029.SS) (1055.HK), lost more than $4 billion in 2008. [ID:nSHA21260]

Shanghai Air, which has lost money for two straight years since 2007, will be delisted if it fails to turn around this year, according to China's securities rules.

Sources familiar with the situation told Reuters in October that the government was discussing the possibility of brokering a merger of China Eastern and Shanghai Air to create a dominant player with roughly 60 percent share of domestic flights in China's financial hub.

The merger talks began speeding up after the debt-ridden carriers got financial aid from the government, an industry source said. (Reporting by Donny Kwok and Fang Yan; editing by Doug Young and Jacqueline Wong)