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UPDATE 1-Tencent, JD.com may combine e-commerce business-source

HONG KONG, Feb 20 (Reuters) - China's largest Internet company Tencent Holdings Ltd and online retailer JD.com are in talks to combine their e-commerce business, a person familiar with the matter told Reuters on Thursday, confirming earlier media reports.

Any deal between two of China's largest online companies would help narrow the huge gap between e-retailers and Alibaba Group Holding Ltd, which dominates China's booming online commerce market.

The prospects for a binding agreement, however, remained unclear, the person familiar with the matter said.

Alibaba's Tmall marketplace controls at least half of all online retail sales and its e-Bay like Taobao also controls around 80 percent of consumer-to-consumer online sales, according to data from Euromonitor.

By comparison JD.com, China's second-largest e-commerce company, has a nearly 13 percent market share.

Tencent and JD.com are considering several options, including Tencent getting a 6 percent stake in JD.com in exchange for merging its less-popular online shopping operations with JD.com's more established platform, Bloomberg said in an earlier report.

The 21st Century Business Herald newspaper had also reported that Tencent may buy a stake in JD.com, citing an unidentified investment banking source.

Tencent declined to comment when contacted by Reuters. A spokesperson for JD.com told Reuters it was not company policy to comment on market rumors. The person who spoke to Reuters declined to be identified as the discussions are confidential.

JD.com has filed for a U.S. initial public offering, seeking to raise $1.5 billion. The company said in December it would top its 100 billion yuan ($16.5 billion) annual sales target in 2013.

Alibaba is also widely expected to launch an IPO, underscoring the rising investor enthusiasm surrounding China's booming online retail market..

China's business-to-consumer e-commerce sales may surpass $180 billion this year due to rising internet penetration, expanding middle-class incomes and a better distribution network, according to New York-based market research firm eMarketer.

Tencent, Alibaba and search engine giant Baidu Inc are also competing to cash in on the rising popularity of mobile internet in China.

Tencent gets the majority of its revenue from computer games, but its mobile games are also hugely popular, according to figures from domestic app stores. Tencent's WeChat social messaging app is also used by more than half of all Chinese smartphone users.

Tencent shares were down 3.1 percent, while the benchmark Hang Seng index was down 1.2 percent.

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