* Talks between Telefonica and Mediaset under way-sources
* Telefonica may buy stake in Mediaset Premium -reports
* Telefonica and Mediaset decline comment
MILAN/MADRID, July 5 Spanish telecoms company Telefonica is in talks to buy a stake in the Italian pay-TV business of Silvio Berlusconi's media group Mediaset , two people familiar with the situation said on Saturday.
"Talks are underway," one of the sources told Reuters, adding that no decision had yet been taken. The second source said a deal could be imminent.
A deal would mark a further expansion of Telefonica into the pay-TV industry, while giving Mediaset an ally at a time when it is facing increasing costs for TV rights.
Italian newspapers had said in unsourced reports that Telefonica could buy a 10 percent stake in Mediaset Premium, the Italian pay-TV business of Mediaset, for 100 million euros ($136.4 million).
Telefonica and Mediaset declined to comment on the reports.
Telefonica had on Friday inked a deal with the Spanish arm of Mediaset that will give it full ownership of Madrid-based pay-TV firm Distribuidora de Television, known as Canal+.
In December Mediaset announced plans to separate its pay-TV operations into a new company, indicating it may sell a stake in the unit to unnamed industrial and financial partners.
Deputy Chairman Pier Silvio Berlusconi, son of the former Italian prime minister, said earlier this week Mediaset was in talks with Qatari-owned broadcaster Al Jazeera and other players to cooperate in the pay-TV business in Italy. ($1 = 0.7331 Euros) (Reporting by Danilo Masoni and Julien Toyer; Editing by David Holmes)