* LAN still studying conditions imposed by regulator
* Merged company would be one of world's biggest airlines
* LAN,TAM shares fall more steeply than local bourses (Adds fresh analyst comment, updates share prices)
By Antonio de la Jara and Alexandra Ulmer
SANTIAGO, Sept 22 (Reuters) - LAN Airlines LAN.SN said on Thursday it hopes its multibillion-dollar takeover of Brazil's TAM TAMM4.SA will be completed in the first quarter of 2012, but it is studying conditions imposed by Chile's regulator.
LAN's chief operating officer, Ignacio Cueto, told a conference in Santiago that Chile's antitrust tribunal's approval was a step forward, but administrative issues arising from the ruling will take four to five months to iron out.
The regulator's conditional approval on Wednesday paves the way for the creation of one of the world's biggest airlines.
"This pretty long process will continue to advance toward a possible integration with TAM ... God willing, in the first quarter of next year," Cueto said.
LAN is carefully studying the tribunal's conditions and will comment on them by Monday, he added. Analysts appeared split on whether LAN would appeal any of the mitigation measures at Chile's supreme court.
"The mitigations don't appear strong enough for LAN (to go to the supreme court)," said Jorge Sepulveda, a LAN analyst with EuroAmerica brokerage in Santiago.
The airlines are seen appealing at least three of the measures, according to a report by Santander GBM in Santiago, who said the restrictions would significantly affect the carriers' operations.
The most restrictive measures are those calling for so-called "interline" agreements with other airlines interested in operating three key routes, quitting one of the two global alliances LAN and TAM are part of, and opening the domestic market to non-Chilean carriers, according to Santander GBM.
Cueto played down a sharp sell-off in LAN shares, which closed down 7.33 percent on Thursday, outpacing losses in Santiago's blue-chip IPSA stock index.IPSA, which ended 5.47 percent lower on fears of a recession in the U.S. and Europe.
Traders said approval of the deal had largely been priced into shares in recent weeks, and some investors were selling the fact. Shares of TAM fell 8.48 percent, outpacing a 4.83 percent drop in Brazil's Bovespa index .BVSP.
But most analysts said they expect shares to recover in the long-term and post strong gains by year-end. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic on LAN and TAM: link.reuters.com/jup83s
FACTBOX-Chile OKs LAN takeover of TAM [ID:nS1E78J0E1]
FACTBOX-Measures LAN must take [ID:nS1E78K1CR]
FACTBOX-Biggest airlines by market cap [ID:nS1E78K20B]
The Chilean government endorsed the deal, saying it would bring benefits to the country.
Industry experts say the ruling of the antitrust tribunal will act as a blueprint for future mergers in Chile. However, they say the deal could face delays in Chile if a third party, such as a rival airline, appeals the decision to the Supreme Court.
Consumer group Conadecus, which prompted the antitrust probe in the first place with a complaint, has said it is satisfied with the conditions imposed and would not need to appeal to the Supreme Court if consumer rights were protected.
The combined $12.38 billion market capitalization of LAN and TAM, Thomson Reuters data shows, would rank company as the world's second-largest publicly traded airline, though the deal involves a share swap that will likely dilute the merged group's overall market value.
The Chilean antitrust tribunal, TDLC, said the merged airline must comply with a host of conditions, including ceding slots on the key Santiago to Sao Paulo route and renouncing participation in one of two global alliances.
The measures also require LAN to modify its self-regulation and cancel and revise code-sharing agreements with airlines that do not belong to the same alliance as the newly merged LATAM on some routes.
LAN has been asked to cede four of its frequencies from Santiago to Lima to other Chilean airlines, which would also limit its flights from the Peruvian capital to other destinations.
"LAN had already committed to most of these measures," said Mabel Weber, senior analyst at BICE Inversiones brokerage in Santiago. "But the Lima issue they weren't expecting ... it's the most difficult one."
In Brazil, the deal to create the new LATAM Airlines Group has already cleared two of three anti-monopoly hurdles and is now awaiting approval from antitrust council Cade.
LAN Airlines SA's LFL.N takeover of TAM SA will create an airline giant with joint revenue of $10.4 billion, based on 2010 figures.
When the planned merger was announced last August, the all-stock transaction was worth an estimated $2.7 billion.
LAN is widely regarded as one of Latin America's most profitable airlines due to a lucrative cargo business that sets it apart from many other international carriers. LAN has been seeking to expand in Brazil -- Latin America's leading aviation market -- for years. (Reporting by Antonio de la Jara, Alexandra Ulmer and Felipe Iturrieta; Writing by Simon Gardner; Editing by John Wallace, Steve Orlofsky and Gunna Dickson)