Trading in Enso and Stora shares was suspended as both companies confirmed newspaper reports they are in talks about combining operations.

"Enso is negotiating a possible combination with Swedish Stora," Enso said in a statement.

Enso said the merger would now be discussed by appropriate administrative bodies. The Finnish government, which owns 44 per cent of Enso, was holding an urgent meeting on the matter, officials said.

Stora's market capitalisation is about $5 billion and Enso's about $3 billion.

The merger would create a paper company bigger than Europe's leader Finnish UPM-Kymmene and the world's second forestry group after International Paper of the United States.

The two Nordic companies had sales of about $1.5 billion each in the first quarter of this year. Their combined 1997 sales were $13.5billion.

Analysts welcomed the deal, saying it was a milestone in the ongoing consolidation of the paper industry. They estimated synergies at around one billion markka annually.

"Enso and Stora will surely find synergies," said Gustav Lucander at Aros Securities.

"It's good when there are fewer players on the market because then over investment and overproduction can be kept in check."

But he also said the market was anxious to see what would happen to the Finnish government's stake in the new company and whether the Wallenberg family, which controls Stora through their company Investor, would continue to play a significant role."If the Wallenbergs continue running the company, it would be favourable because they would be a strong owner dedicated to shareholder value," Lucander said.

Analysts said the market would not like to see Investor pulling out and leaving the Finnish state as the key shareholder.

"Investor has indicated they would do something with Stora -- either increase shareholdervalue or sell out," one analyst said. "We don't know what their view is now and that makes the merger more complicated to assess."Enso and Stora have been on the prowl for a partner for a while but few expected them to get together.

Even though Enso ruled out a share swap with a fellow Finnish company Metsa-Serla last month, many in the market thought the two companies could eventually team up.

(Reuters)