UPDATE 1-Delphi begins sounding out banks on IPO - sources

* Delphi sounding out banks, IPO possible in 2011

* Timing hinges on market strength, GM IPO timing

* IPO would mark turnaround after four-year bankruptcy (Adds background on Delphi restructuring, no comment from GM, investors, byline)

By Soyoung Kim and Kevin Krolicki

DETROIT, July 20 (Reuters) - U.S. auto parts maker Delphi has begun sounding out investment banks about the prospect of an initial public offering that would mark its return as a listed company as early as next year, according to three people familiar with those early-stage discussions.

The timing of an IPO for privately held Delphi, which emerged from a four-year bankruptcy in October, remains subject to a number of uncertainties, including the strength of the equity markets, the sources said.

A pitch to potential investors has not begun and meetings between Delphi representatives led by Chief Executive Rodney O'Neal and investment bankers who might lead an IPO will not begin for weeks, they said.

In addition, a stock offering for Delphi, once a unit of General Motors Co [GM.UL], will have to be timed to avoid a conflict with the much larger GM IPO that could come later this year, according to the sources, who asked not to be named because the discussions remain informal and confidential.

Delphi declined to comment, saying decisions on any stock offering would be made by the company's board and investors.

An IPO for Delphi would mark a successful return for the Troy, Michigan-based auto parts maker after a grueling bankruptcy that slashed its costs and its reliance on sales of lower-margin components to U.S. automakers.

A stock listing for Delphi could also represent a major payout for a group of lenders led by Silver Point Capital LP and Elliott Management that won a battle in bankruptcy court to buy the supplier's key assets.

That investor group agreed to forgive nearly $4.5 billion of bankruptcy loans it acquired from previous lenders and agreed to invest another $900 million in the company.

DELPHI CEO: MARKETS WILL HELP SET TIMING

One banker with knowledge of the initial Delphi discussions said Delphi could be valued at around $7 billion.

Last year, with U.S. auto sales at their lowest level since the early 1980s, Federal Mogul (FDML.O) had considered a bid for Delphi as low as $2 billion, people involved in consideration of that offer said at the time.

Elliott declined to comment. Silver Point could not be reached. GM, which retains a stake in Delphi, declined to comment.

"My job is to run this company and make it as valuable as possible," Delphi's O'Neal said in an April interview with Reuters when asked about a potential IPO. "The owners, working with our board will look at this monetization issue."

He added: "The markets will help dictate that."

Now known as Delphi Automotive LLP, the supplier posted a $210 million net profit for the first quarter, its first full quarter out of bankruptcy.

Delphi's reliance on GM, which carved it out through a 1999 IPO, has also been sharply reduced by its restructuring.

GM once accounted for 85 percent of Delphi's revenue. By the first quarter, the top U.S. automaker, which went through its own bankruptcy in 2009, represented just 20 percent of Delphi's sales.

Delphi also used bankruptcy to sharpen its focus on higher-margin product lines centered on electronic controls for vehicles and engine systems, safety-related components and on-board entertainment systems.

The slow-growing North American vehicle market, which had accounted for 68 percent of Delphi's sales in 2005, represented just 32 percent of Delphi's 2009 sales.

At the same time, Delphi's exposure to Asian markets, led by China, has almost tripled from 6 percent of sales in 2005 to 17 percent last year.

O'Neal said in April Delphi was looking for acquisitions in China and expected to outpace revenue growth in that market, now the world's largest market for vehicles ahead of the United States. (Reporting by Soyoung Kim and Kevin Krolicki in Detroit, additional reporting by Philipp Halstrick in Frankfurt, editing by Leslie Gevirtz)