Kawasaki Heavy and Mitsui to Start Merger Talks

* Merger would create $20 bln revenue company

* Union possible sometime next business year-sources

* Internal opposition to merger exists-sources

(Reuters) - Kawasaki Heavy Industries Ltd and Mitsui Engineering & Shipbuilding Co Ltd will begin talks on a possible merger, according to three sources familiar with the discussion, although as yet it is unclear whether the two Japanese heavy machinery makers can overcome internal reticence about a union.

The companies have sought out financial advisors to help with a merger, without formally appointing any, the sources said on condition they were not identified because they are not authorised to talk to the media. At the earliest a merger could happen during the next business year from April 1, 2014, they added.

A merger between Kawasaki Heavy, best known outside Japan for its motorbikes, and Mitsui Engineering, a leading maker of ship engines, would create a company with some $20 billion of revenue, putting it in second place behind heavy machinery industry leader Mitsubishi Heavy Industries Ltd.

Mitsui Engineering's shares jumped by as much as 20.7 percent to a near two-year high on Monday, while Kawasaki's shares gained 1.8 percent after the talks were first reported by Japan's leading business daily, the Nikkei. The Nikkei share average climbed 2.1 percent to a near five-year high.

Greater scale would help a merged company better compete for machinery and infrastructure contracts in emerging economies. A deal would give Kawasaki, which is looking for opportunities beyond its nuclear reactor business, access to Mitsui Engineering's ocean gas and oil drilling platform technology, while a combined firm would be better able to compete with expanded shipbuilding operations, according to analysts.

Mergers among Japan's sprawling heavy equipment makers have proved difficult however in the face of rivalries between conglomerates that stretch back to the country's emergence as an industrial nation more than a century ago.

"There is still disagreement within Mitsui's management. As of now, those pushing for the merger have yet to persuade those opposing it," one of the sources said.

Mitsubishi Heavy, which makes products ranging from fighter jets to nuclear power plants, in November agreed to combine its thermal power businesses with that of Hitachi Ltd to better compete against overseas rivals such as Siemens and General Electric.

The two, however, a year earlier balked at agreeing on a wider merger of their infrastructure businesses.