UPDATE 2-News Corp raises prospect of Sky News spin-off-FT

* News Corp could separate Sky News from BSkyB-FT

* Culture ministry, News Corp decline to comment

(Adds government minister comment, BSkyB shares)

LONDON, Jan 20 (Reuters) - News Corp NWSA.O has told Britain it might separate Sky News from BSkyB BSY.L to avoid a lengthy review of its move to take full control of the satellite broadcaster, the Financial Times reported.

Citing three people familiar with talks between News Corp and the government, the FT said on Thursday that selling the 24-hour satellite news channel was one option the Rupert Murdoch-led media group was considering.

Britain’s Department for Culture, Media and Sport, which is examining the proposed 7.8 billion-pound ($12.5 billion) bid, declined to comment on the report, as did News Corp.

News Corp wants to buy the 61 percent of satellite broadcaster BSkyB it does not already own to consolidate cashflows from a business it helped build.

However, rivals have raised concerns that the merger would give Murdoch too much influence over public opinion, since News Corp also owns the mass-selling Sun and News of the World newspapers in Britain, as well as the Times of London.

Culture Minister Jeremy Hunt is consulting with News Corp before deciding whether to refer the matter to Britain’s Competition Commission, which could take another six months to investigate, pushing up the price of any deal.

He has not yet published a report sent to him last month by communications regulator Ofcom, which made a recommendation as to whether he should refer the matter for further investigation or not.

Critics of the proposed deal say Hunt’s decision to hold talks with News Corp before publishing the report is evidence of a lack of neutrality on this issue.

Speaking in parliament on Thursday, Hunt said: “This is not a decision about Rupert Murdoch or Rupert Murdoch’s business. It is a decision about whether a specific transaction is going to affect plurality and that is a decision which I am approaching with total impartiality and following strict due process.”

“I will take as much time as necessary to come to a considered decision on this very important issue.”

Murdoch’s newspapers backed the Conservative Party in last year’s parliamentary elections, and Prime Minister David Cameron’s communications chief is Andy Coulson, former editor of the News of the World.

The News of the World is currently embroiled in an investigation into whether its journalists illegally hacked phones of celebrities including actor Sienna Miller.

In a submission to Ofcom published in November, BSkyB said Sky News was editorially independent and should not complicate the proposed takeover bid.

It questioned whether another owner would have any commercial incentive to continue the loss-making channel.

News Corp and BSkyB have not yet agreed a price for any merger -- 7.8 billion pounds is the latest proposal from News Corp but BSkyB’s independent directors want more. The parties are seeking regulatory approval before further negotiations.

BSkyB shares traded up 0.3 percent at 748 pence at 1431 GMT, above News Corp’s last offer of 700 pence per share but below the 800 pence that BSkyB’s independent directors have demanded as a minimum. ($1=.6257 Pound)

Reporting by Karolina Tagaris, Georgina Prodhan, Kate Holton and Tim Castle; Editing by Erica Billingham and David Cowell