UPDATE 1-Liberty Media gets IRS approval for split-off

* Liberty Media can split off unit in tax-free transaction

* IRS approval was key hurdle to DirecTV combination

NEW YORK, Oct 27 (Reuters) - John Malone's Liberty Media Corp said on Tuesday it has received approval from the U.S. Internal Revenue Service for a tax-free split-off of its Liberty Entertainment unit ahead of a merger with DirecTV Group Inc (DTV.O).

Malone is the controlling shareholder of DirecTV, the largest U.S. satellite TV operator, and is seeking approval from shareholders on Nov. 19 to combine it with Liberty Entertainment assets, such as regional sports networks and gaming company FUN Technologies.

Liberty said it received a private letter ruling from the IRS which approves the split-off as a tax-free transaction. No gain or loss would be recognized by Liberty Media on distribution or exchange of the Liberty Entertainment shares.

The IRS approval was a key condition for the split-off process.

Liberty has been eager to reduce the gap between the value of Liberty Entertainment's assets and its market value.

Despite owning more than 54 percent of DirecTV's equity, Liberty has traded at a discount to the satellite company -- though that gap has shrunk in the months since it announced its plans to combine.

"If you're an arbitrageur and you're going short DirecTV and long Liberty, then you care about the very minute movement in the stock," said Thomas Eagan, analyst at Collins Stewart.

"And this is important news because it makes the likelihood of the combination next month more concrete."

Shares of Liberty Media's Liberty Interactive group (LINTA.O) were off 4 cents at $11.87 while Liberty Entertainment group shares LMDIA.O were also off 4 cents, at $30.77. Liberty Capital group shares (LCAPA.O) were up 8 cents at $22.01. DirecTV was down 18 cents to $25.96. (Reporting by Yinka Adegoke, editing by Gerald E. McCormick)