* Japan nuclear industry hobbled by shutdowns after Fukushima
* In talks to merge fuel ops as early as spring 2017 -source
* Merger could pave way to combine reactor businesses -source (Adds industry executive comment on GE's influence)
By Makiko Yamazaki and Kentaro Hamada
TOKYO, Sept 29 (Reuters) - Three Japanese conglomerates are in talks to combine their loss-making domestic nuclear fuel operations, people with direct knowledge of the matter said, as the outlook for restarts of reactors following the Fukushima nuclear crisis remains bleak.
Hitachi Ltd, Toshiba Corp and Mitsubishi Heavy Industries Ltd aim to merge the operations as early as spring 2017, one of the people said, declining to be identified as the discussions were confidential.
The person added that the three companies may eventually consider merging their nuclear reactor businesses, although nothing specific has been discussed so far.
Only three of Japan's 42 reactors are currently operating after they were idled in the wake of the 2011 earthquake and tsunami that destroyed Tokyo Electric Power Co's Fukushima Daiichi power station. Public opposition, safety and other regulatory obstacles has made the outlook for further restarts extremely unclear.
The move has also likely been encouraged by General Electric's growing interest in the market for fuel for pressurised water reactors (PWRs), said an executive at a Japanese utility. GE has a controlling stake in a joint venture with Hitachi and Toshiba called Global Nuclear Fuel, which provides fuel for boiling water reactors (BWRs).
The traditional dividing line in the U.S. nuclear industry with GE specialising in fuel for BWRs and Toshiba's Westinghouse focusing on fuel for PWRs is no longer applicable, he said.
"The merger of Japan's nuclear fuel businesses will to a large extent take its cues from GE," said the executive, declining to be identified as he was not part of the discussions.
PWRs have been growing in popularity, particularly in emerging economies like China. As of December 2015, PWRs accounted for more than 80 percent of 66 nuclear reactors under construction.
The three Japanese conglomerates are aiming to reach a preliminary agreement by the end of the year, the person with direct knowledge of the matter said.
The companies said they were considering options for their domestic nuclear fuel businesses but no decisions had been made.
The conglomerates are likely to first form a joint holding company for their fuel businesses before merging them into one entity, the Nikkei business daily reported.
Industry sources said the government has been pushing the firms to integrate their fuel businesses, raising the chances that any merger plan will not run into any anti-trust issues.
Until the Fukushima disaster, the nuclear fuel business had been a stable source of profits for the domestic nuclear power industry.
Toshiba, which has overseas nuclear fuel operations through its U.S. unit Westinghouse, forecasts that fuel will generate 17 percent of the estimated 870 billion yen ($8.56 billion) in revenue from its nuclear power business for this financial year.
Hitachi has a global nuclear power alliance with General Electric Co while Mitsubishi Heavy has one with France's Areva SA.
Hitachi's shares gained 2.4 percent and Mitsubishi Heavy advanced 2.3 percent on Thursday. Toshiba's stock rose 0.2 percent while the broader market climbed 1.4 percent. ($1 = 101.6100 yen) (Reporting by Makiko Yamazaki and Kentaro Hamada; Additional reporting by Tim Kelly in Tokyo and Diptendu Lahiri in Bengaluru; Editing by William Mallard and Edwina Gibbs)