UPDATE 2-AU Optronics considers new-generation LCD plant

* Considers building 8.5-generation plant

* Observing market conditions for next 1-2 months

* Plant could cost $3 billion

(adds analyst's quotes, background)

By Baker Li

TAICHUNG, Taiwan, June 19 (Reuters) - Taiwan's AU Optronics (2409.TW) (AUO.N) is considering building a plant costing about $3 billion using an advanced technology to make panels for flat-screen TVs to satisfy rising demand in coming years.

The LCD (liquid crystal display) sector has been showing signs of recovery this year after suffering from a price slump that forced manufacturers to slash output in the second half of last year.

AU Optronics, the world's third-largest LCD maker, plans to monitor market conditions closely for the next one to two months before finalising a decision on building the LCD facility that uses the advanced 8.5-generation technology.

"We already have the land. The construction of the plant is still under consideration. We will have to observe market conditions for the next 1-2 months," AU's Vice Chairman H.B. Chen told Reuters after the company's annual shareholders' meeting.

The plant will likely begin production in 2011 at the earliest and could have a motherglass capacity of as high as 40,000 per month, Chen said.

Each motherglass can be cut into six 52-inch panels using the 8.5-generation technology.

AU Optronics, which competes with larger South Korean rivals Samsung Electronics (005930.KS) and LG Display (034220.KS), already has a production line, not a plant, that uses the 8.5-generation technology.

Despite the recent recovery in LCDs, some analysts say the sector might only enjoy a brief respite if LCD firms overestimate demand and pump out too much capacity later this year, leading to a huge inventory surplus and pressuring prices.

But Andrew Tang, assistant vice president of Taiwan International Securities, said he was watching the market situation and was not overly worried about oversupply problems for now.

"AU Optronics is considering building a 8.5-G plant to meet rising demand of panels in China and to lift its competitiveness," Tang said.

"They've gone through a careful appraisal before coming up with the decision and they definitely see a huge demand for panels in coming years."

AU and smaller local rival Chi Mei Optoelectronics (3009.TW), have recently benefitted from a spate of orders from China, while AU has also seen signs of recovery in TV demand from North America.

In May, AU said it expected to return to profitability in the second half of this year, after operating in the red in the fourth quarter of last year and the first three months of this year [ID:nTP238911].

AU's shares ended 0.3 percent lower, underperforming a 1.4 percent gain in the main TAIEX index's . (US$1=T$32.9) (Writing by Lee Chyen Yee; Editing by Dhara Ranasinghe)