* Merger would create refiner with more than 50 pct share
* Government pushing for consolidation in sunset industry (Recasts, adds analyst comment, detail)
By Taro Fuse and Taiga Uranaka
TOKYO, Nov 16 (Reuters) - Japan's largest oil refiner JX holdings Inc is in talks to merge with rival TonenGeneral Sekiyu, two people with knowledge of the matter said on Monday, potentially creating a company that will control more than half of a market in long-term decline.
JX, with a market value of about 1.15 trillion yen ($9.4 billion), has already held talks with TonenGeneral, which is worth about half as much, the sources said, declining to be identified as the matter remained confidential.
The companies are aiming to reach an agreement as early as next month, one of the sources said.
A deal would create Japan's biggest refinery in terms of gasoline sales and market value since JX itself was created from the merger of several companies in 2010.
It also coincides with a Japanese government push towards consolidation in the refining sector, where five big firms and three smaller ones are vying for business in a country where a shrinking population is increasingly opting for more fuel efficient vehicles.
Last week, Japan's Idemitsu Kosan Co agreed last week to take over smaller refiner Showa Shell Sekiyu in a deal worth about $4 billion that will create Japan's second-biggest refiner by capacity.
Shares in both JX and TonenGeneral rose on Monday after a trading halt imposed earlier was lifted. The planned deal was earlier reported by the Nikkei newspaper.
"This will be a positive for the industry itself as it is facing a structural demand decline," Thanh Ha Pham, an analyst at Jefferies (Japan), said in a note, referring to the proposed takeover.
Asked whether JX is in talks with TonenGeneral as reported in the Nikkei, JX spokeswoman Hiroko Kuki said: "Nothing has been decided."
In July, JX President Yukio Uchida had said the company was open to talks on a possible merger.
A statement from TonenGeneral said the company was considering "various options" including tie-ups but had nothing to announce.
Every week, nearly 20 gas stations close in Japan, which slipped into recession again in the third quarter.
The government has ordered the refining industry to cut capacity cut by nearly 1.4 million barrels per day (bpd) to around 3.6 million bpd by March 2017. ($1 = 122.4600 yen) (Additional reporting by Yuka Obayashi and Emi Emoto; Writing by Aaron Sheldrick; Editing by Miral Fahmy)