UPDATE 2-Reliance Comm and Aircel in talks to merge Indian mobile businesses

* Reliance Comm in talks with Aircel for wireless merger

* Deal likely to prompt further consolidation

* Reliance Communications, Aircel battling heavy debt load (Adds more details, analyst comments)

By Devidutta Tripathy

MUMBAI, Dec 22 (Reuters) - Reliance Communications and Aircel have begun talks to combine their wireless telecomoperations to create India's second largest mobile operator asintensifying competition fuels consolidation in a crowdedmarket.

The Reliance mobile phone business is India's fourth-biggestby customer numbers while Aircel ranks fifth. The combinedbusiness would surpass Vodafone's Indian operation as number two in the sector.

India's telecoms market is the world's second-biggest behindChina in terms of mobile phone subscriptions, but tough competition means low margins for the 10 carriers.

Reliance Communications, controlled by billionaire AnilAmbani, has entered a 90-day exclusivity period for the talkswith Aircel, it said on Tuesday. Financial details of theproposed transaction have not been disclosed.

In the first sign of sector consolidation, RelianceCommunications last month agreed to buy Russian conglomerateSistema's Indian mobile phone business in an all-stockdeal.

This month it agreed to sell its tower business to a groupincluding TPG Capital Management LP to cut a heavy debt load.The Aircel talks exclude those assets.

Reliance Jio, a telecoms business controlled byAnil Ambani's elder brother and India's richest man MukeshAmbani, is preparing to launch the nation's biggest 4G network,which will only add to competition.

Reliance Communications has a pact with Reliance Jio toshare some airwaves. A deal with Aircel, majority owned byMalaysia's Maxis Communications, will expand itsaccess to 3G airwaves and add 4G capacity to its portfolio.

Amresh Nandan, a research director at Gartner, saidincreasing competition will make life difficult for bottom fouror five telecoms carriers, adding more such deals could beexpected next year.

Bharti Airtel Ltd is the current market leader.

Reliance Communications' India operations that include itswireless business accounted for 82 percent of its revenue ofabout 47 billion Indian rupees ($710 million) for the threemonths to September.

If the Aircel deal goes through, Reliance Communicationsshareholders will receive free shares in the new combinedwireless entity, said a source with direct knowledge of thematter. Reliance Communications will continue to own itsenterprise and undersea cable businesses, the source said.

With a debt of about $6 billion, Reliance Communications isthe most leveraged among listed Indian carriers. Unlisted Aircelis also battling a heavy debt burden, which rating agency ICRAsaid was about 185 billion rupees ($2.8 billion) as of 2013. ($1 = 66.2330 Indian rupees) (Additional reporting by Karen Rebelo; Editing by David Goodmanand Keith Weir)