Kuwait's bourse is in talks with Deutsche Boerse and Nasdaq OMX Group Inc to buy a foreign trading system, sources familiar with the situation said.

The Kuwait Stock Exchange (KSE), the second-largest Arab bourse, has dropped talks with NYSE Euronext, the sources said.

KSE has been in talks for over a year to buy a trading system and possibly find a market operator, and is looking to sign a deal by March or April, a source close to the bourse said.

The bourse had originally planned to sign a deal in 2008. 'It's Deutsche Boerse or OMX, there are no talks with NYSE Euronext any more,' the source said in remarks echoed by a diplomat and an industry source.

'Deutsche Boerse is relatively optimistic about the outcome,' the diplomat said.

Kuwait, the world's seventh-largest oil exporter, wants to emulate some of the success of Gulf Arab neighbours such as Dubai which have managed to diversify their economies away from oil and attract investors and financial institutions.

The bourse has been hit by a string of irregularities and Kuwait is the only Gulf Arab state that has no financial markets regulator.

Plans to create a bourse watchdog have been delayed by tension between parliament and the government.

Other Gulf markets have attracted foreign partners, with Qatar saying in June it had agreed to sell 25 percent of the Doha Securities Market to NYSE Euronext for $250 million.

An initial deal for a trading system in Kuwait is estimated to be worth up to around $100 million.-Reuters