Toshiba Corporation is in talks to merge part of its chip operations with semiconductor unit of NEC Corporation, a person with knowledge of the negotiations said, as they struggle with slumping demand and prices.

The talks will likely focus on Toshiba spinning off its system chip operations and merging them with NEC Electronics Corporation, a semiconductor maker owned 65 percent by NEC Corp, the person said.

Semiconductor makers have been hit by fierce competition and tumbling prices, while the global recession has added to their woes by weakening demand.

Toshiba Chief Executive Atsutoshi Nishida said on Thursday that too many chip makers, especially those who make system chips, are fighting it out in Japan and that they need to consolidate to win globally.

He said Toshiba, which is facing a record operating loss this business year, would consider spinning off its system and discrete chip operations. A Toshiba spokesman declined to comment.

NEC Electronics said in a statement that each company must prioritise operational reforms for the revival of the chip industry, and that it would push forward with its own restructuring steps including cutting costs by $890 million over two years and eliminating 1,200 contract jobs.

The Nikkei business daily said NEC has been talking with Fujitsu as well about a merger of their chipmaking operations.

Fujitsu has been looking for partners and other ways to turn around its chip operations, but a spokesman said nothing had been decided. He said he was checking on whether talks with NEC were being held.

As of 0032 GMT, Toshiba shares were awash with sell orders at 350 yen, down 9.1 percent from Thursday's close. NEC dropped 5 percent to 249 yen and NEC Electronics was up 0.3 percent at 608 yen. Fujitsu shares were down 4.5 percent at 422 yen.-Reuters