UPDATE 1-China Eastern to acquire Shanghai Airlines, sell shares

* China Eastern to acquire Shanghai Airlines via share swap

* China Eastern to raise about 7 billion yuan via share sale

* Shanghai Airlines to delist after merger (Adds more details, background)

By Samuel Shen and Jacqueline Wong

SHANGHAI, July 13 (Reuters) - China Eastern Airlines (600115.SS)(0670.HK) said on Monday that it will acquire Shanghai Airlines (600591.SS) via a share swap and raise about 7 billion yuan ($1.03 billion) selling shares to select investors in Shanghai and Hong Kong to replenish its working capital.

China Eastern, the country's third-biggest carrier, will swap 1.3 of its shares for one share of Shanghai Airlines (600591.SS) as part of a long-anticipated government-brokered merger.

China Eastern will also sell up to 1.35 billion yuan-denominated A shares to 10 select institutions, including its parent, and sell as many as 490 million H shares to a related company in Hong Kong, according to a Shanghai Stock Exchange filing.

The merger between the two loss-making carriers will create a player with more than half of the market share in Shanghai, helping them compete more effectively with domestic rivals Air China (601111.SS) (0753.HK) and China Southern Airlines (600029.SS) (1055.HK).

Chinese carriers have been grappling with weak air travel demand amid high fuel prices and slower economic growth.

Trading in China Eastern's shares listed in Hong Kong and Shanghai, suspended since last month, will resume trading on Monday, it said.

China Eastern shareholders who do not want to conduct a share swap can exercise a cash option that would grant 5.25 yuan for each A share and HK$1.56 for each H share, while Shanghai Airline shareholders can choose to get 5.5 yuan in cash for each share they own, the statement said. Shanghai Eastern will be delisted and lose its legal person status after the merger, according to the statement.

The company will become a wholly-owned subsidiary of China Eastern while retaining its brand and independent operations, the official Xinhua news agency said late on Sunday, citing Liu Jiangbo, spokesman of the team overseeing the tie-up.

China Eastern will issue up to 1.35 billion A shares for at least 4.75 yuan apiece to raise about 6.41 billion yuan in a private share placement. Meanwhile, it will sell up to 490 million H shares for at least HK$1.4 apiece to raise about HK$686 million.

The planned share sale, which followed a 7 billion yuan fund raising completed on July 2, will further improve China Eastern's balance sheet. ($1=6.832 Yuan) (Reporting by Samuel Shen and Jacqueline Wong; additional reporting by Donny Kwok; Reuters Messaging; jacqueline.wong@thomsonreuters.com; +8621 6401 1791))