UPDATE 3-Japan's FamilyMart in talks to buy am/pm - source

* FamilyMart, No. 3 convenience store, may buy am/pm-source

* Deal would follow scrapped takeover attempt by Lawson

* FamilyMart to team with Itochu, deal about Y10 bln - Nikkei

* Advantage Partners has been looking to sell am/pm (Adds company comments, background)

By Taiga Uranaka

TOKYO, Nov 12 (Reuters) - Japan's No.3 convenience store operator FamilyMart Co (8028.T) is in talks to buy smaller rival am/pm Japan Co, a source familiar with the matter said, as Japanese convenience stores fight for dominance in an overcrowded market.

With more than 40,000 stores nationwide, Japan's convenience store chains are faced with weak growth prospects at home, prompting them to look for acquisitions and overseas expansion.

The Nikkei business daily reported earlier that FamilyMart and its top shareholder Itochu Corp (8001.T) would likely buy am/pm Japan Co from its parent Rex Holdings Co for 10 billion yen ($110 million).

But it remains unclear whether the parties have resolved issues that had forced Japan's No. 2 chain Lawson Inc (2651.T) to give up its plan to buy am/pm Japan earlier this year. [ID:nT232151]

A Lawson source said at the time that the $149 million deal fell apart because the U.S. owner of the am/pm brand, am/pm International Inc, demanded that many of the stores retain the am/pm name.

FamilyMart President Junji Ueda has said any acquisition of another chain is unlikely to work unless it can put all stores under the FamilyMart brand.

The Nikkei said am/pm stores would take the FamilyMart name after the takeover.

In separate statements, FamilyMart and Itochu said the reports were not something they had announced and declined further comment. Rex Holdings officials were not immediately available for comment.

Rex Holdings is owned 92 percent by Japanese private equity firm Advantage Partners, which has been seeking a buyer for am/pm. [ID:nT20934]

An acquisition of am/pm Japan would close the gap with bigger rival Lawson, which has about 9,600 stores in Japan. am/pm has about 1,100 stores and FamilyMart, which also has sizable overseas operations, runs about 7,600 stores in Japan. ($1=89.90 Yen) (Reporting by Taiga Uranaka in Tokyo; Arundhati Ramanathan in Bangalore; Editing by Deepak Kannan and Chris Gallagher)