UPDATE 2-Itochu plans to buy Nippon Residential -Nikkei

(Adds Nippon Residential, Advance Residence comments paras 5-6)

TOKYO, July 25 (Reuters) - Japanese trading firm Itochu Corp (8001.T) plans to buy Nippon Residential Investment Corp (8962.T) and merge it with its own real estate investment trust to make the fourth-largest listed REIT, the Nikkei business daily said.

Itochu plans to combine Nippon Residential with its REIT, Advance Residence Investment Corp (8978.T), to improve investment efficiency, the paper said without citing sources.

The deal, which would be the first merger of REITs in Japan, would make the combined company the fourth-largest listed REIT, with assets of about 390 billion yen ($4.12 billion), the paper said.

Itochu -- which is considering buying a private placement of new shares by Nippon Residential while simultaneously acquiring the REIT's management firm for several billion yen -- has acquired preferential negotiating rights for the purchase of Nippon Residential, the Nikkei said.

Nippon Residential Investment Corp and Advance Residence Investment Corp said in separately issued statements on Saturday that they had not publicised any information regarding a merger.

Advance Residence Investment Corp added in its statement that it was not the case that any decision had been made. Nippon Residential said it was in the process of selecting a new sponsor and would release any information that needs to be made public in a timely manner.

Nippon Residential is under the umbrella real estate fund operator Pacific Holdings Inc, which applied for bankruptcy protection in March.

Nippon Residential then scrambled to find a new sponsor so that it would be able to refinance and cover redemptions of its bonds, the Nikkei said. (Reporting by Archana Shankar in Bangalore and Masayuki Kitano in Tokyo)