UPDATE 4-China's Yancoal in talks to buy Australia's Gloucester-sources

* Yancoal could use Gloucester to meet float requirement

* Gloucester market cap at $1.4 bln after steep fall this year

* Gloucester, Yanzhou Coal Mining share trading halted

* Shares in top Gloucester owner Noble jump 5 pct (Adds valuation details, graphic)

By Sonali Paul

MELBOURNE, Dec 20 (Reuters) - Chinese-controlled Yancoal Australia is in talks to buy Gloucester Coal to create Australia's top independent coal miner, three sources said on Tuesday, as strong Asian demand drives a boom in coal deals.

Gloucester, which has a market value of A$1.4 billion ($1.4 billion), confirmed it was in talks with an unnamed suitor on a potential takeover and requested a two-day trading halt on its shares pending an announcement on a deal.

Yancoal is looking to take over Gloucester to combine their thermal and coking coal assets in New South Wales and Queensland, improve its port access, and to use Gloucester as a backdoor route for listing in Australia.

"They're on an acquisition drive. Maybe they kill two birds with one stone," said Andrew Harrington, an analyst at Patersons Securities, who values Gloucester at A$1.9 billion.

Yancoal Australia declined to comment. Trading in Yancoal's parent, Yanzhou Coal Mining Co Ltd was halted in Shanghai and Hong Kong "pending a price sensitive announcement".

China's fourth-largest coal producer was required to float at least 30 percent of the Australian business on the local exchange by 2012 as a condition of its A$3.3 billion takeover of Felix Resources in 2009.

A reverse takeover of Gloucester would give Yancoal a local listing without having to risk an initial public offering in a shaky market, where coal stocks in particular have been pummelled on worries about a global economic downturn.

Gloucester's shares have tumbled 42 percent this year to A$7.03, putting it in the 30 worst performing stocks among Australia's 200 biggest companies.

WILLING SELLER?

A deal would be the latest in a slew of coal mergers and acquisitions in Australia as miners look to tap into strong Asian demand, particularly from top consumer China.

Key to the deal will be Gloucester's 64 percent owner, Hong Kong-based Noble Group, which has a track record of buying junior miners, helping fund projects, then selling out.

Sources familiar with the talks played down reports of an offer as high as A$2 billion for Gloucester.

Seven analysts' valuations on Gloucester range between A$8.41 and A$10.43 share, averaging A$9.29 a share, valuing the group at A$1.88 billion.

A deal around that level would represent a 32 percent premium to Gloucester's last trade - below the premium paid in the two biggest recent deals in Australia involving producing assets.

Peabody Energy paid a 47 percent premium in its $5 billion takeover of Macarthur Coal, while Rio Tinto and Mitsubishi Corp paid a 37 percent premium to acquire Coal & Allied.

Noble, which tried to sell its stake in Gloucester last year to Macarthur Coal, had no comment on Yancoal's approach to Gloucester. Macarthur offered A$8 cash per share last year, but that was before Gloucester expanded with some acquisitions.

Noble's Singapore-listed shares jumped 5 percent to S$1.165 on the prospects it would be able to sell its Gloucester stake for a profit.

MORE COAL

Yancoal and Gloucester both have mines and projects in New South Wales and Queensland. Gloucester aims to expand production to 10 million tonnes a year by 2016, while Yancoal expects to produce 20 million tonnes a year by 2015.

That would put a combined group ahead of Whitehaven Coal , which last week announced a $2.5 billion takeover of Aston Resources to create a company producing 25 million tonnes a year by 2016.

Yancoal is being advised by UBS and Citi, while Gloucester is being advised by Lazard.

Since taking over Felix Resources, Yancoal has bought Syntech Resources for A$203 million and is about to complete the A$297 million acquisition of Premier Coal from Wesfarmers .

It sought to buy Whitehaven Coal earlier this year but the two were never able to agree on a price.

Yancoal's move on Gloucester means the Chinese group will likely not be bidding for New Hope Coal, another Australian coal miner that is up for sale.

Earlier this month, parent Yanzhou Coal, which produced 49.4 million tonnes of coal in 2010, announced plans to issue up to $2.3 billion in bonds. ($1 = 1.0072 Australian dollars) (Additional reporting by Alison Leung in HONG KONG; Editing by Lincoln Feast and Ian Geoghegan)