Alusuisse and Pechiney both confirmed there were in advanced talks on the three-way merger, but cautioned it was impossible to say whether there would be a deal. There was no comment from Alcan and Alusuisse said in its short statement in Zurich it would say no more for now.

Alcan holds majority 51 per cent stake in Indian Alumunium (Indal), a leading aluminium company in India. Indal had staved off takeover threat from Sterlite Industries last year.

An Alcan/Alusuisse/Pechiney alliance would have a combined market capitalisation of $ 18.78 billion, based on Monday night's closing share prices, trailing global leader Alcoa Inc of the United States with a value of $ 22.96 billion.

But total 1988 revenue for the trio was $ 24.804 billion, beating Alcoa's $ 15.5 billion, according to Reuters Securities 3000 data. The mergedgroup would account for slightly less than 15 per cent of world primary aluminium output, and around 18 per cent of Western output, analysts said.

Following moves in the aluminium industry over recent years to rationalise and streamline, the merger could result in pricing power at the product level and clear economies of scale, they said.

A merger of Alcan and Pechiney -- the world's second and fourth largest aluminium producers -- with Alusuisse would also lead to the formation of a leading player in packaging.

Analysts said a merger made sense in the context of weak aluminium prices, noting the three companies fitted together well, both in terms of products and geographically, and could expect noticeable cost benefits from an alliance. "It is clear that... significant cost reductions are at play and the stock market loves this. You can see that by looking at the stock price," analyst Christoph Streit at Zurich's Bank Leu said. But it was difficult to say which share of the three was the mostattractive, he added.

Alusuisse shares touched an early high at 1,828 Swiss francs, up 4.5 percent on Monday's close, and were trading up 2.87 per cent at 1,794 francs by 1055 GMT. The blue-chip SMI index .SSMI was down 1.52 per cent.

In Paris, Pechiney shares peaked at 54.20 euros before easing to 52.15 euros, up 0.87 per cent in a lower overall market. On Wall Street, Alcan shares closed up $13/16 at 31/13 on Monday. There was no immediate price impact on European aluminium markets from the news.

Analyst Nick Hatch of Flemings Global Mining Group in London said Alcoa's competitors had been forced to act after the U.S. Group bought assets in Europe, including Spain and Italy.

Alusuisse said it remained interested in an alliance after merger talks with Germany's Viag fell through earlier this year in the wake of valuation differences.

The exact implications of a merger for Alusuisse's Lonza specialty chemicals business were not clear, but stock market analysts said a sale or flotation waslikely.

Apart from possible regulatory hurdles in Europe and the United States, analysts said Alcan, Alusuisse and Pechiney top brass faced the challenge of blending Canadian, Swiss and French corporate and managerial cultures and structures.

"This is not a done deal as yet. We have to see the details with the whites of our eyes before people give these shares a second-leg kicker," Larry Kaplan, analyst at Flemings Global Mining Group, told Reuters Television.