* Deal would create Europe's largest listed fund manager
* Lloyds would get Aberdeen shares, deferred cash payments
* Aberdeen shares up 6 pct; Lloyds' rise to near 5-year high (Recasts, adds analyst reaction, context)
By Matt Scuffham and Tommy Wilkes
LONDON, Oct 24 (Reuters) - Aberdeen Asset Management is in talks to buy Scottish Widows Investment Partnership from Britain's Lloyds Banking Group in a deal that would create the largest listed fund manager in Europe.
Analysts said any deal was likely to be worth up to 500 million pounds ($808 million) and could deliver cost savings and a stronger position in fixed-income products for Aberdeen, while helping Lloyds meet regulatory demands to raise more capital.
Under the terms being discussed, part state-owned Lloyds would end up owning a stake in Aberdeen as payment, along with deferred cash payments conditional on the business's future performance, Aberdeen said on Thursday.
Shares in Aberdeen were up 6 percent at 451.3 pence by 1440 GMT, while Lloyds' were 2.7 percent ahead at 79.99 pence, near their highest level since December 2008.
News of the talks came as a surprise to analysts, given Aberdeen's focus had been on growing its existing business, and not all were convinced.
"We have a mixed reaction," said RBC Capital Markets analyst Peter Lenardos. "Aberdeen is once again an acquisition-driven growth story and not a dividend yield/capital return story."
Aberdeen chief executive Martin Gilbert said as recently as April that a bid for Scottish Widows was "extremely unlikely".
Lloyds hired Deutsche Bank in April to advise on the sale of the business, and would end up with around a 10 percent stake in Aberdeen if Scottish Widows sold for 500 million pounds.
Industry sources said Aberdeen was not the only party interested in Scottish Widows and the bank expects to make a decision on a preferred bidder by the end of the year.
Lloyds declined to comment.
EUROPEAN NUMBER ONE
Buying Scottish Widows would raise Aberdeen's assets under management by more than 70 percent to close to 350 billion pounds, transforming Aberdeen into the largest listed manager in Europe with more assets than rival Schroders.
Adding Scottish Widow's strength in fixed-income would also provide diversification for a firm strong in emerging markets and global equities.
As well as cost savings, Aberdeen said a transaction would boost earnings, supporting its commitment to future dividend increases and the return of surplus capital to shareholders.
David McCann, an analyst at Numis, said any deal could enhance the value of Aberdeen by about 5 percent, but that client attrition and a loss of shareholder confidence could counter the boost to earnings and cost savings.
Led by Gilbert, Aberdeen has enjoyed a sharp rise in its assets under management since the financial crisis, buoyed by client demand for its global emerging market equities funds and a flurry of acquisitions.
Following deals that included buying asset management businesses owned by Credit Suisse and Royal Bank of Scotland, Aberdeen said in 2010 that it planned to focus instead on organic growth.
According to its most recent trading update, funds under management at Aberdeen stood at 201.7 billion pounds at the end of August, against around 177 billion in 2011. The firm joined Britain's blue chip FTSE 100 index last year.
($1 = 0.6185 British pounds) (Reporting by Matt Scuffham and Tommy Wilkes; Editing by Pravin Char and Mark Potter)