UPDATE 3-NetApp buys LSI storage unit for $480 million

* NetApp eyes high-performance computing

* LSI puts funds toward share buybacks

* LSI shares steady after spike (Adds detail on stock performance quote)

SAN FRANCISCO, March 9 (Reuters) - Data storage equipment maker NetApp Inc (NTAP.O) announced it would buy microchip maker LSI Corp's (LSI.N) Engenio external storage system business for $480 million, the latest acquisition in the red-hot sector.

NetApp said it was paying cash for Engenio, which will help it win business in the rapidly growing bandwidth intensive video and high-performance computing markets.

Milpitas, California-based LSI said it would put funds from the sale toward a new stock repurchase program of up to $750 million. Its shares spiked briefly as much as 2.5 percent in after-hours trading, but quickly gave back gains.

The popularity of online video and the switch to digital data in various businesses are generating huge amounts of online traffic. That, in turn, is seen boosting demand for effective storage products and "cloud computing" -- accessing remote computing power and data over the Internet.

NetApp said the acquisition would be finalized in about 60 days, helping diversify its sales channels.

"It offers then a more traditional fiber channel storage system so that they can go after some portions of the high-end market they previously could not play in," said Matt Bryson, an analyst at Avian Securities.

LSI shares have grown about 2.5 percent in 2011, a little less than the Philadelphia Semiconductor Index's .SOX 5 percent rise.

"We currently expect to be in the market in the very near term and aggressive throughout 2011," LSI chief executive Abhi Talwalkar told Reuters, referring to the share buyback program.

Dealmaking in the storage sector heated up last year as EMC Corp (EMC.N), IBM Corp (IBM.N), Dell Inc (DELL.O), Hewlett-Packard Co (HPQ.N) and Oracle Corp (ORCL.O) began jostling for dominance. (Reporting by Noel Randewich; editing by Phil Berlowitz and Andre Grenon)