UPDATE 2-Australia's Tabcorp wins licence, eventual merger seen

* Tabcorp gets retail-betting licence from Australia's Victoria state

* To pay A$410 mln up-front for 12-year licence

* Eventual merger seen with rival Tatt's Group

* Tabcorp shares in trading halt, Tatt's recovers from fall (Adds analyst comment, details)

By Victoria Thieberger

MELBOURNE, July 19 (Reuters) - Australian gaming group Tabcorp has regained its licence to run retail betting operations in Victoria, the country's second most populous state, strengthening its hand in an expected merger with weakened rival Tatt's Group .

With Australians ranking as the world's biggest gamblers, Tabcorp was once seen as a fool-proof investment but the industry is now seen as ripe for consolidation, having suffered setbacks such as smoking bans at clubs, competition from new Asian casinos and an equine flu that disrupted horse-racing.

Industry analysts said the licence decision cleared uncertainty over Tabcorp's future revenues and it would make sense for the rival firms to form a single wagering operator.

"I think there is an extremely strong rationale for these businesses to get together," said UBS analyst Sam Theodore, adding there would be large cost savings and a combined group would be in a stronger position to deal with regulatory changes.

"I think in the next 12 months we are bound to see that happen," Theodore said.

In a statement, the Victorian state government said that Tabcorp would pay a premium up front of A$410 million ($435 million) for the licence renewal for retail betting, which was less than analysts expected.

The government said the new 12-year licence, which begins in August 2012, would allow Tabcorp to run totalisator -- a betting system for horse racing -- and fixed-odds betting. It would also enable the firm to operate the only off-course retail network in the state, and operate a betting exchange.

The government said British bookmaker Ladbrokes pulled out of the bidding for the licence at the last minute.

Tabcorp split itself into two firms in June, with the casinos group Echo Entertainment Group owning assets including Sydney's Star City casino and Jupiters on the Gold Coast.

Shares in Tatt's dropped as much as 3.9 percent after it said it did not win the licence but recovered to trade steady at 0225 GMT. Tabcorp shares were on a trading halt. (Reporting by Victoria Thieberger; Editing by Mark Bendeich and Lincoln Feast)