UPDATE 1-Nortel to sell multi-service switch business

* Sells multi-service switch business for $39 mln in cash

* Nortel divesting business to pay back debtholders

(In U.S. dollars)

TORONTO, Aug 27 (Reuters) - Nortel Networks Corp (NRTLQ.PK) is selling its global multi-service switch business to Marlin Equity Partners and Samnite Technologies Inc for $39 million in cash, the company said on Friday.

Nortel, once North America's biggest telecommunications equipment maker, said it entered into a "stalking horse" asset sale of its North America, Caribbean and Latin America and Asia multi-service switch business, or MSS, with PSP Holding, a special purpose entity backed by Marlin and Samnite.

Nortel is also selling its Europe, Middle East and Africa MSS business to PSP.

A "stalking horse" bid is used when a bankrupt company chooses an interested firm to set the bar so that other bidders can't low-ball a purchase price.

Nortel said the sale includes intellectual property related to the business, and employees will have the opportunity to continue working for PSP.

Nortel filed for bankruptcy protection in January 2009 and has been auctioning off its business in an effort to pay back debtholders.

The deal was filed with the U.S. Bankruptcy Court for the District of Delaware along with a motion to establish an auction that allows other qualified bidders to submit better offers. A similar motion will be filed with the Ontario Superior Court of Justice. ($ 1=$1.06 Canadian) (Reporting by Solarina Ho)