* Jet, SpiceJet shares rally on deal hopes
* Jet-Etihad deal possible in six weeks - govt source
* Etihad interested in Jet's low-cost business - source
* No foreign carrier has invested yet in an Indian airline (Adds AirAsia, Jet comments)
By Anurag Kotoky
NEW DELHI, Nov 26 (Reuters) - Jet Airways India Ltd and SpiceJet Ltd, battling hot competition and high operating costs, are in talks to sell minority stakes to foreign investors, said a senior Indian government official with knowledge of the discussions.
Abu Dhabi's Etihad Airways and Malaysia's AirAsia Bhd have stepped up after India changed its rules in September to allow foreign carriers to buy stakes of up to 49 percent in local airlines.
The Jet-Etihad tie-up would be the bigger of the two deals, with a possible value of up to nearly $440 million, but the government official provided no further details on the stakes involved or costs.
Talks between Etihad and Jet, which has 100 planes and is India's largest airline by total passengers carried, have been the subject of recent media reports citing unnamed sources.
Jet shares rose about 14.3 percent and SpiceJet jumped as much as 19.2 percent on Monday, continuing their rallies from last week amid speculation that they may become the first Indian carriers to secure foreign investment.
"The talks are on. This is more or less final. It may take around a month and a half," the government source told reporters, referring to the Jet-Etihad negotiations.
"This deal is not just about investment, but also technology and partnership in many other ways," said the source, who declined to be identified.
At current share prices, a 49 percent stake in Jet Airways would be valued at 24.3 billion rupees ($437.17 million), while for Spicejet the value would be 10.82 billion rupees.
The Indian aviation industry lost a combined $2 billion last year and all but unlisted IndiGo lost money, hurt by high state taxes on jet fuel, expensive airports and regulatory uncertainty.
Jet and Etihad already have a code-sharing agreement and a deal could help them win market share from state-owned Air India, as well as from Dubai-based Emirates Airline, which dominates routes between India and the Middle East.
Etihad is interested in access to Jet's low-fare domestic network under JetKonnect, an industry source said in Dubai.
Jet Airways and Etihad declined comment.
Thus far, there is no clarity on valuations for a Jet-Etihad deal and internal finance teams of both airlines are in talks without involving bankers, said another source, who is familiar with the discussions, but not directly involved.
The founder of Jet Airways is likely to convert shares owned by its holding company into his personal stake to comply with foreign investment regulations, the government source said.
Tail Winds Ltd, the Isle of Man-based investment vehicle of Jet founder Naresh Goyal, currently holds 79.99 percent of Jet Airways.
Etihad, which expanded globally through stake purchases in firms like Air Berlin and Virgin Australia, is looking to extend its geographical reach to India and other Asian markets, its chief executive told Reuters last month.
SPICEJET AND AIRASIA
AirAsia Bhd, Asia's largest budget carrier, currently flies to four south Indian cities and the eastern city of Kolkata, and about 20 countries across Asia.
Malaysian long-haul budget carrier AirAsia X, founded by Malaysian tycoon Tony Fernandes, who also heads AirAsia Bhd, pulled out of India earlier this year citing weak demand and lack of profits.
SpiceJet, a low-fare carrier with 48 planes that is India's fourth-largest airline by domestic market share, said in a statement that some foreign investors have expressed interest in picking up a stake in the company, but it was premature to comment on a possible deal.
"AirAsia has not submitted a bid for the Indian budget carrier, and has no intention of doing so," Chief Executive Tony Fernandes said in a statement. He did not say whether the company was looking to buy a minority stake in SpiceJet.
AirAsia said in September it had no immediate plans to enter the Indian market because aviation fuel taxes and airport charges were too high.
Muted interest from foreign carriers despite India's liberalised rules has recently forced the government to rethink its foreign investment policy. A government source said earlier this month that India was open to further reforms to lure overseas investors into its airlines.
Competition in the sector is driven in part by government-subsidised losses at state-owned Air India. However the environment has eased lately due to the decline in cash-and-debt strapped Kingfisher Airlines, the former No.2 operator which has not flown since the start of October.
Any deal between an Indian carrier and a foreign airline has to be cleared by the Indian government.
($1 = 55.5850 Indian rupees) (Additional reporting Abhishek Vishnoi, Manoj Dharra and Indulal PM in MUMBAI, Praveen Menon in DUBAI and Niluksi Koswanage and Siva Sithraputhran; in KUALA LUMPUR; Editing by Tony Munroe, Jeremy Laurence and Sophie Walker)