UPDATE 1-Toshiba shares gain after Western Digital offers to exit chip bid for better JV terms

for better JV terms@

* Toshiba shares rise more than 4 percent

* Western Digital offers to drop out of a group bidding

* Toshiba board to meet on Wednesday to discuss the chip unit sale (Adds details on board meeting, share price, background)

TOKYO, Sept 6 (Reuters) - Toshiba shares rose more than 4 percent on Wednesday after sources told Reuters that Western Digital Corp has offered to drop out of a group bidding for its flash memory chip business to take a stronger position in their joint venture instead.

The move could see Toshiba finally seal a deal to sell the chip business after months of delays, providing it with the funds needed to cover billions of dollars in liabilities arising from the failure of U.S. nuclear unit Westinghouse.

Toshiba's board is due to meet on Wednesday to discuss the deal, the sources have told Reuters. Western Digital's potential participation will be the subject of future talks among the consortium members, they said.

Toshiba and Western Digital failed to seal a deal by a previously-planned deadline last week due to a disagreement over the U.S. firm's future stake in the business, sources have said.

Failure to clinch a sale in the next few weeks could mean that it may not clear all necessary regulatory approvals by the end of the financial year in March, which would likely lead to Toshiba reporting negative equity for two years in a row, increasing its chances of its shares being delisted.

Toshiba shares had gained 4.17 percent to 325 yen at 0034 GMT, while the benchmark Nikkei share average had tumbled to a four-month low.

(Reporting by Chris Gallagher and Junko Fujita; Editing by Stephen Coates)