UPDATE 1-Wal-Mart in talks on partnership with Indonesia's Matahari-sources

* Partnership could involve taking stake - sources

* Partner may face tight retail margins - analyst

(Updates with quotes, details)

JAKARTA/SINGAPORE, Feb 8 (Reuters) - Wal-Mart Stores Inc
is in talks to become a partner of Indonesian retailer
PT Matahari Putra Prima to develop its hypermarts,
though South Korea's Lotte Shopping Co Ltd has
pulled out, sources said on Tuesday.

International retailers are jockeying for position in
emerging markets as they look for sources of growth outside
maturing U.S. and European markets, although the cost of
competing is often too much to justify widespread expansion.

Lippo Group, an Indonesian conglomerate which controls
Matahari via PT Multipolar , last month scrapped plans
to sell its Hypermart chain because of low offers and instead
opted to seek a global partner to expand.

"Lotte is out due to disagreement over pricing and
branding," said one of the four sources with direct knowledge of
the deal, who declined to be identified because the details were
not public.

"However, Wal-Mart is still in talks with the group on the
possible partner deal."

Wal-Mart and Lotte had both been interested in buying the
Hypermarket assets, along with French retailer Casino Guichard
Perrachon SA and private equity group Carlyle Group
, in a sale that Lippo had hoped would raise over $1
billion.

The partnership could still involve taking a significant
stake in Matahari to gain control over the hypermarket assets,
the sources said.

Wal-Mart, the world's biggest retailer, has a significant
investment in China including 104 hypermarkts, and in India it
has a joint venture with Bharti Enterprises, while Casino just
bought Carrefour's Thai assets for $1.2 billion.

Lotte already has a significant presence in Indonesia with
its Lottemart chain and is currently the fourth biggest
hypermart player in Southeast Asia's biggest economy.

Indonesia has been an hot investment destination in the past
two years, with its stock market surging 46 percent last year.
Growing domestic consumption, together with public spending and
investment, led fourth quarter 2010 GDP to rise 6.9 percent.

However, Ari Pitoyo, senior retail analyst at PT Mandiri
Sekuritas in Jakarta, warned that firms looking for a slice of
Indonesia's consumer sector could face tight profit margins.

"Indonesia's retail business is very tight in margins
because it doesn't have bargaining power with food producers
like Indofood and Unilever," Pitoyo said.

"Whoever comes in as a Matahari partner has to be very
efficient, including in logistics, to reap the benefit, or will
have to face some losses."

Multipolar, which owns a 48 percent stake in Matahari,
appointed Bank Of America Merrill Lynch to become its
strategic advisor to seek a global partner for Matahari.

Hypermart is Indonesia's second-biggest hypermarket chain
after PT Carrefour Indonesia, with 52 outlets in the world's
fourth most populous nation, generating annual revenue of $1
billion. It told Reuters last month it is eyeing the top spot
and aims to expand aggressively across the archipelago.

(Reporting by Janeman Latul in JAKARTA, Saeed Azhar in
SINGAPORE and Park Jung Youn in SEOUL; Editing by Neil
Chatterjee)