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* Deal would create Europe's largest listed fund manager
* Lloyds would get Aberdeen shares, deferred cash payments
* Aberdeen shares up 6 pct; Lloyds' rise to near 5-year high (Recasts, adds analyst reaction, context)
By Matt Scuffham and Tommy Wilkes
LONDON, Oct 24 (Reuters) - Aberdeen Asset Management is in talks to buy Scottish Widows Investment Partnership fromBritain's Lloyds Banking Group in a deal that wouldcreate the largest listed fund manager in Europe.
Analysts said any deal was likely to be worth up to 500million pounds ($808 million) and could deliver cost savings anda stronger position in fixed-income products for Aberdeen, whilehelping Lloyds meet regulatory demands to raise more capital.
Under the terms being discussed, part state-owned Lloydswould end up owning a stake in Aberdeen as payment, along withdeferred cash payments conditional on the business's futureperformance, Aberdeen said on Thursday.
Shares in Aberdeen were up 6 percent at 451.3 pence by 1440GMT, while Lloyds' were 2.7 percent ahead at 79.99 pence, neartheir highest level since December 2008.
News of the talks came as a surprise to analysts, givenAberdeen's focus had been on growing its existing business, andnot all were convinced.
"We have a mixed reaction," said RBC Capital Markets analystPeter Lenardos. "Aberdeen is once again an acquisition-drivengrowth story and not a dividend yield/capital return story."
Aberdeen chief executive Martin Gilbert said as recently asApril that a bid for Scottish Widows was "extremely unlikely".
Lloyds hired Deutsche Bank in April to advise on the sale ofthe business, and would end up with around a 10 percent stake inAberdeen if Scottish Widows sold for 500 million pounds.
Industry sources said Aberdeen was not the only partyinterested in Scottish Widows and the bank expects to make adecision on a preferred bidder by the end of the year.
Lloyds declined to comment.
EUROPEAN NUMBER ONE
Buying Scottish Widows would raise Aberdeen's assets undermanagement by more than 70 percent to close to 350 billionpounds, transforming Aberdeen into the largest listed manager inEurope with more assets than rival Schroders.
Adding Scottish Widow's strength in fixed-income would alsoprovide diversification for a firm strong in emerging marketsand global equities.
As well as cost savings, Aberdeen said a transaction wouldboost earnings, supporting its commitment to future dividendincreases and the return of surplus capital to shareholders.
David McCann, an analyst at Numis, said any deal couldenhance the value of Aberdeen by about 5 percent, but thatclient attrition and a loss of shareholder confidence couldcounter the boost to earnings and cost savings.
Led by Gilbert, Aberdeen has enjoyed a sharp rise in itsassets under management since the financial crisis, buoyed byclient demand for its global emerging market equities funds anda flurry of acquisitions.
Following deals that included buying asset managementbusinesses owned by Credit Suisse and Royal Bank ofScotland, Aberdeen said in 2010 that it planned to focusinstead on organic growth.
According to its most recent trading update, funds undermanagement at Aberdeen stood at 201.7 billion pounds at the endof August, against around 177 billion in 2011. The firm joinedBritain's blue chip FTSE 100 index last year.
($1 = 0.6185 British pounds) (Reporting by Matt Scuffham and Tommy Wilkes; Editing by PravinChar and Mark Potter)
