UPDATE 1-Xstrata sticks to nil-premium merger with Anglo

* Xstrata says proposal remains nil premium merger of equals

* Paper says Xstrata to offer up to 5 bln stg deal sweetener

* Says Xstrata to raise further cash via rights issue

(Recasts with Xstrata comment)

By Rhys Jones

LONDON, July 12 (Reuters) - Mining group Xstrata Plc (XTA.L) remains committed to a nil-premium merger with Anglo American (AGLJ.J) (AAL.L), the company said on Sunday after a newspaper said it will offer a 5 billion pounds ($8.1 billion) sweetener to seal the deal. The Observer newspaper cited sources as saying Xstrata would raise the money via a rights issue because its debt-laden balance sheet had made it difficult to justify further borrowings.

But Xstrata said in a statement sent to Reuters its proposal "remains a nil premium merger of equals, in which both companies' shareholders will share equally the substantial benefits that are uniquely available from a merger."

It added "the proposal bears none of the characteristics of a takeover, in which a premium would typically be payable."

Anglo's shareholders are in favour of a merger deal in principle but want better terms than the nil-premium, all-share merger that Xstrata proposed in June, the Observer said.

The report also said Xstrata was willing to consider taking a smaller stake in the enlarged company.

Xstrata has been mulling its options after Anglo last month rejected proposals for a merger that would have created a mining giant valued at more than 40 billion pounds.

Anglo last week appointed veteran industrialist John Parker as chairman to help bolster its leadership as it seeks to fend off the unwanted Xstrata approach. [ID:nLA342519] (Editing by Karen Foster and David Holmes) ($1=.6172 Pound)