* Deutsche Boerse says not in talks with CME
* Deal 'not as crazy as it sounds': analyst
* Deutsche Boerse shares up 5.6 pct, had been up 12 pct
* Regulators would reject tie-up: ex-NYSE exec
By Ann Saphir and Tom Polansek
SAN FRANCISCO/CHICAGO, Feb 25 Deutsche Boerse said on Monday that it is not in deal talks with CME Group Holdings Inc, but some analysts see a sale to CME as an attractive option for the German bourse at a time when profits are under pressure and scale is increasingly important.
Earlier on Monday, Bloomberg, citing four people familiar with the situation, reported that CME had approached Deutsche Boerse in December about a possible merger. Bloomberg also said the two met again in January and haven't yet made a decision.
CME declined to comment, while Deutsche Boerse said the exchange operators were not in negotiations.
A merger between the two exchange operators would face steep hurdles, including scrutiny from European antitrust authorities, who blocked the German exchange's proposed merger with NYSE Euronext just over a year ago.
A deal with CME Group would finally offer Deutsche Boerse the chance at a partnership that could pass muster with regulators, who have scuttled several high-profile deals over the past few years, analysts said.
"You're talking more of a tie-up between a U.S. market operator and a European-based operator. It's possible that would face fewer hurdles," said Gaston Ceron, equity analyst for Morningstar.
Exchange operators have been trying over the past few years to strike deals to build scale, expand geographically and create more profitable products.
A drop in activity has hurt exchanges globally, with trading at CME-run exchanges falling 15 percent last year, and trading at Deutsche Boerse's Eurex dropping 19 percent, according to data from the Futures Industry Association.
With declining trading volumes putting pressure on profits, and the promise of a surge in new business as regulators force more over-the-counter derivatives trading onto regulated exchanges, the temptation to consolidate remains strong.
Atlanta-based IntercontinentalExchange Inc, which competes fiercely with CME, late last year set off another round of consolidation of the industry when it agreed to buy NYSE Euronext for $8.2 billion.
"NYSE-ICE is a precedent: at least, the regulators are winking at it," said Andre Cappon, president of New York-based consultancy The CBM Group.
ICE Chief Executive Jeffrey Sprecher has said his proposed takeover has so far been "well received" by European regulators. ICE, whose main business is energy trading, and NYSE, which runs the Big Board, have little overlap.
Shares of Deutsche Boerse closed up 5.6 percent, swelling the Frankfurt exchange operator's market capitalization to 9.5 billion euros ($12.6 billion).
That market capitalization would make it the biggest acquisition ever by CME, valued at about $19.5 billion. CME bought the Chicago Board of Trade in 2007 for about $11.9 billion; it acquired the New York Mercantile Exchange in 2008 for about $8.3 billion.
Any deal, however, faces challenges.
For starters, both CME and Deutsche Boerse have publicly said they do not want to do a big deal.
CME officials have been telling investors for about two years that they want to build, not buy. CME runs a London-based clearinghouse and has applied for a license to start a European exchange later this year.
"We will as always remain opportunistic, but for now we do not see any large M&A opportunities," CME CEO Phupinder Gill told analysts on Feb. 5.
With a history of failed merger attempts, Deutsche Boerse is also thought to be loathe to take chances. Deutsche Boerse's failed plans to combine with NYSE were preceded by unsuccessful attempts at deals with Euronext and the London Stock Exchange .
CEO Reto Francioni said last week Deutsche Boerse would focus primarily on growing on its own but would be open to joint ventures. He said the company is focusing on growth in Asia, but he added that a lack of suitable takeover targets there made it unlikely any acquisitions would occur.
One former NYSE executive said regulators would never approve the merger.
"Anybody who understands the competitive situation and the way competition authorities are going to look at this, knows it is impossible," said Georges Ugeux, who ran the New York Stock Exchange's European business until 2003 and is now CEO of Galileo Global Advisors. "It is just unacceptable."
Unlike ICE and NYSE, the Chicago and Frankfurt exchange companies have a lot in common: both have successful franchises in futures tied to debt and interest rates.
Still, analysts said the two exchange operators are different enough to have a chance at clearing antitrust hurdles.
Because Deutsche Boerse's Eurex focuses on European rates, and CME's Chicago Board of Trade and Chicago Mercantile Exchange offer contracts tied to U.S rates, they may be able to convince regulators their merger would not change the competitive landscape.
"Deutsche Boerse-CME is not as crazy as it sounds," CBM Group's Cappon said. "It doesn't dominate any continent."
CME may also want to try to buy Deutsche Boerse as a shortcut into European derivatives trading.
"It's very hard to build from scratch," Cappon said. "Why not (buy), if you can get it through the regulators."