* Newcrest could face top-tier local rival if Barrick, Newmont unite
* Speculation merged company will spin off Asia-Pacific assets
* Newcrest March qtr gold output drops 11 pct vs previous qtr
SYDNEY, April 23 (Reuters) - Australia could spawn a new mega gold producer if Barrick Gold Corp and Newmont Mining Corp spin off their Asia-Pacific assets, heating up competition with the country's underperforming market leader Newcrest Mining Ltd.
Barrick and Newmont have been holding friendly merger talks, but remain at odds over how to group mines each company owns in Australia, New Zealand and possibly Papua New Guinea and Indonesia into a separate company, sources close to the talks have said.
If the two companies' Asia-Pacific mines were grouped together, annual output could exceed 2.3 million ounces, challenging Newcrest as Australia's biggest gold producer and the world's fifth largest.
The new entity could also potentially gain a higher rating among investors than it would receive within a combined Barrick-Newmont.
"There's huge investor appetite for an alternative to Newcrest," said Eagle Mining Research gold analyst Keith Goode.
"The next stages of growth for Newcrest are seen as either risky, as in the case for their assets in Ivory Coast, or too long term. What the Barrick-Newmont assets in Asia-Pacific offer is immediate production and cash flow, with growth through exploration potential."
Anglogold Ashanti has also considered spinning off its Tropicana and Sunrise Dam mines in Australia into a separate entity to benefit from investor interest in an alternative to Newcrest, but has yet to act.
Newcrest has held the No. 1 spot on the Australian Stock Exchange since 2010, with total production this year seen at about 2.3 million ounces. Number two is Evolution Mining , a distant second at less than a half-million ounces.
However, the miner's stock has lost three-quarters of its value over the past three years as it has struggled with high costs, disappointing output at its Lihir mine in Papua New Guinea and a 28 percent fall in the gold price in 2013.
A sharp drop in half-year profit and a jump in debt also fuelled concerns it may need to tap the market for capital, while it reported an 11 percent fall in March quarter gold output from the previous quarter on Wednesday, well above the 7 percent drop forecast by UBS.
Newcrest also said it had cut 208 jobs over the last quarter at its Lihir mine.
ARRAY OF MINES
Australia was the world's second-biggest gold producer behind China in 2013, with output of 10.5 million ounces, according to ThomsonReuters data, but many of its biggest mines are in the hands of foreign-owned miners.
Newmont owns Australia's biggest gold mine, Boddington, and is a 50-50 partner with Barrick in the 800,000-ounces-per-year Super Pit lode 700 km (440 miles) away. Other assets include the Jundee and Tanami gold mines in Australia and Waihi in New Zealand. Newmont's other main asset in the Asia-Pacific region is the Batu Hijau copper and gold mine in Indonesia.
Besides its half-stake in the Super Pit, Barrick could roll its Porgera mine in Papua New Guinea into the fold, bringing with it close to 500,000 ounces.
"If you have an Asia-Pacific-listed demerged asset, you would get strong Asia-Pacific interest and be more competitive for those investment dollars than otherwise in North America," said Morgans mining analyst James Wilson.
Still, there's no guarantee a sizeable number of investors would drop Newcrest for a new Barrick-Newmont combination.
"If it was to be listed here (Australia) and it was materially cheaper than Newcrest, then maybe you'd consider it, but I would say from what I've seen, Newcrest has the better asset mix than the proposed spin co," said Darko Kuzmanovic, a portfolio manager at Caledonia Investments. Caledonia does not own Barrick or Newmont shares.
Barrick gained 1.8 percent to C$19.37 ($17.55)in heavy trade on Tuesday after Goldman Sachs upgraded the stock to a "buy" from "neutral" and investors placed bets on whether it can pull off a bid for Newmont.
($1 = 1.0703 Australian Dollars)
(Additional reporting by Sonali Paul in Melbourne; Editing by Richard Pullin)