UPDATE 2-Air Berlin, TUIfly in cross-holding deal

* TUI Travel, Air Berlin in advanced talks

* TUIfly, Air Berlin to hold up to 20 pct in each other

* Air Berlin to take over TUIfly's city route sector

* Air Berlin shares jump 4.1 pct, TUI Travel up 3 pct (Add analyst comment, background, updates shares)

FRANKFURT, March 17 (Reuters) - Air Berlin (AB1.DE) is in advanced talks for a cross-shareholding with TUI Travel's (TT.L) TUIfly, Air Berlin said on Tuesday, hailing the end of a lengthy struggle to consolidate the German airline industry.

Under the planned deal, Air Berlin would take a stake of up to 20 percent in TUIfly, which would in turn acquire a corresponding stake in Air Berlin via a capital increase.

Air Berlin said it would then take over TUIfly's city route sector, while the charter sector would remain with TUIfly.

TUIfly has 41 aircraft flying to destinations across Europe as well as to beach vacation spots such as the Canary Islands. Around 15 of the aircraft would now fly under Air Berlin's banner, a person familiar with the matter told Reuters.

"In our view, this is a win-win situation. As a reminder, TUI has been searching for a partner for TUIfly since more than a year," Equinet analysts said in a note.

Shares of Air Berlin were up 4.1 percent at 3.58 euros at 1032 GMT, after having jumped as much as 14.5 percent. The stock has lost about half of its value over the past 12 months.

TUI Travel's shares rose 3 percent to 241.75 pence.

NO MARRIAGE

TUI Travel had been seeking a partner for TUIfly to lower costs for ground facilities, maintenance and catering. Over the past year talks over possible combinations of different airlines in Germany have collapsed.

A year ago, TUI Travel neared a deal to merge TUIfly with Lufthansa's (LHAG.DE) Germanwings, while Air Berlin had proposed a marriage to Thomas Cook Group's (TCG.L) Condor airline.

Then Air Berlin left Condor at the altar as the regulatory approval process for the deal dragged on, and Condor joined Germanwings and TUIfly in three-way aviation talks.

In September, the talks started falling apart and a deal was never completed. Now, Air Berlin and TUIfly plan to take stakes in each other to test a new pairing that would give Air Berlin access to routes to Italy, Cologne and Stuttgart.

Final approval of the TUI Travel and Air Berlin boards was still needed, Air Berlin said.

Air Berlin operates 125 planes and flies to 127 destinations including southeast Asia, the United States and the Caribbean.

The company added most of its long-haul routes by buying charter airline LTU in 2007. Last week, Air Berlin Chief Executive Joachim Hunold said he was considering selling LTU due to a weak economic environment and pilots' pay raise demands.

Air Berlin would still continue marketing its long-haul flights through LTU, Hunold said at the time.

TUI Travel was formed in 2007 from the merger of TUI AG's (TUIGn.DE) travel division and Britain's First Choice. TUI AG holds 51.4 percent of shares in TUI Travel, according to the UK-based company's website. (Reporting by Maria Sheahan; Additional reporting by Angelika Gruber; Editing by Rupert Winchester)