UPDATE 2-Fuji Heavy, Daihatsu to share cars in Japan -paper

(Updates with analyst, company comments)

TOKYO, Oct 30 (Reuters) - Japan's Fuji Heavy Industries Ltd (7270.T), the maker of Subaru brand cars, and Daihatsu Motor Co (7262.T) will supply each other passenger cars in the domestic market, the Nikkei business daily reported on Tuesday.

Fuji Heavy, held 8.7 percent by Toyota Motor Corp (7203.T), has said that it wants a subcompact car to compete more effectively globally, and that limited resources meant it may tap resources within the Toyota group for engines, vehicle platform or joint development.

In the tie-up being discussed, Daihatsu, Toyota's minivehicle unit, would supply 5,000 to 6,000 subcompacts with 1- to 1.5-litre engines a year to Fuji Heavy starting as early as mid-2008, the Nikkei said without citing sources.

Daihatsu will also supply 660cc minivehicles to Fuji Heavy, which will phase out its production of those cars, the paper said. In return, Daihatsu will procure 2-liter-engine passenger cars from Fuji Heavy, it said.

Fuji Heavy, Toyota and Daihatsu said nothing had been decided, while noting they have an ongoing discussion to explore various areas of cooperation.

Fuji Heavy and Daihatsu already have an agreement under which Daihatsu supplies Subaru with about 6,000 compact cars a year in Europe. Sale of the car, based on Daihatsu's Boon model and called Subaru Justy, began last month.

Shares of Fuji Heavy rose 1.4 percent to 579 yen in early afternoon trade, while Daihatsu lost 1.3 percent to 1,174 yen. The transport sector subindex .ITEQP.T lost 0.5 percent.

JPMorgan Securities analyst Takaki Nakanishi said cooperation along the lines of the report would make sense in the long term, but warned against overreacting.

"We continue to see few real positives for either (company's) fundamentals and would caution on the possibility that the shares will overreact to the news over the near term," he wrote in a note to clients.

Fuji Heavy and Daihatsu would have to figure out how to maintain capacity utilisation at their domestic factories, Nakanishi said, adding: "We believe it is unwise to simply focus on the merits of the deal."

Under a four-year business plan announced in February, Fuji Heavy President Ikuo Mori said the company would refrain from chasing sales volume in Japan even if that meant pulling back sales of low-margin minivehicles, and focus instead on full-sized cars to secure solid earnings.