UPDATE 1-MAN says to merge Diesel and Turbo divisions

* Synergies to be gained from merger in Power Engineering

* Reduces number of manufacturing divisions to two

* Power Engineering to have sales of 4 bln euros

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FRANKFURT, July 14 (Reuters) - German industrial conglomerate MAN SE (MANG.DE) plans to merge its off-road diesel engine business with its turbomachinery division to save costs, and form a counterbalance to its trucks operations, it said on Tuesday.

"This will allow the MAN Group to combine the engine and power plant expertise of the Diesel Engines business with the compressor and turbine technology of the Turbomachinery business to form a strong Power Engineering unit for the long term," Chief Executive Hakan Samuelsson said in a statement.

The new combination will have annual revenue of around 4 billion euros ($5.60 billion) and employ about 12,000 people worldwide. The head of Power Engineering will be Diesel chief Georg Pachta-Reyhofen and its headquarters will be in the Bavarian city of Augsburg.

The merger will reduce the number of MAN's manufacturing divisions -- which include its substantially larger Commercial Vehicles segment -- to two from three.

"Diverse synergies can be harnessed, e.g. through joint sales activities, improved knowledge transfer and a standardized image for the after-sales services under the brand name MAN PrimeServ," MAN Turbo head Klaus Stahlmann said.

MAN's Turbo business makes components used to create pressure for various industrial processes, such as axial, centrifugal and screw compressors or steam and gas turbines.

MAN Diesel competes most closely with Finland's Wartsila (WRT1V.HE) in designing, licensing and in some cases manufacturing massive two-stroke and four-stroke low and medium-speed engines used to power container ships or tankers.

In recent years, the diesel engines business has become a key driver for profitability at MAN, profiting from a boom in world trade and higher production of oceangoing vessels.

The German firm particularly benefits from its absolute dominance in the global market for two-stroke low-speed engines, a highly lucrative business with margins of 20 percent and more.

Weighing up to 2,200 tonnes and as much as 29 metres long, these engines are so huge that MAN licenses their production out to manufacturers situated right next to the shipyards where they eventually find their use.

Early in December, MAN had said it plans to expand into the high-speed diesel engine business, specifically in marine applications, where it would compete directly with dominant domestic rival Tognum (TGMG.DE).