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Merkel's party opposes Telekom selloff to fund broadband upgrade - sources

* Coalition talks consider asset sales to fund glass-fiber rollout

* Small parties want to sell Deutsche Telekom stake

* Merkel aides say no; one favors Deutsche Post sale

* FDP: Glass-fiber rollout to cost 20-25 bln euros

FRANKFURT/BERLIN, Nov 7 (Reuters) - Germany's ruling conservatives oppose selling the state's holding in Deutsche Telekom to raise billions of euros for a national broadband upgrade, preferring instead to divest stock in Deutsche Post, a senior source said.

"Can we privatize companies to this end? Yes we can," said the source, from Chancellor Angela Merkel's Christian Democratic Union. "But I wouldn't necessarily start with Telekom."

The source added that "if we were to think at all" about selling off government interests, state-held shares in Deutsche Post could go first as that company is less sensitive to national security concerns.

The CDU's position is in stark contrast with calls by two smaller parties in talks to form a coalition government to sell down the state's 31.9 percent holding in Deutsche Telekom to invest in a national rollout of ultra-fast glass-fiber to homes and businesses.

The liberal Free Democrats want to sell off the entire holding. The Greens, meanwhile, propose parking the 14.5 percent of Telekom that is directly controlled by Berlin at a state development bank, raising 10 billion euros ($11.6 billion).

A second CDU source dismissed the Greens' proposal as a "book-keeping trick."

The disagreement comes as Germany, Europe's industrial powerhouse, seeks billions to upgrade its creaking internet infrastructure and keep its factories competitive.

Twelve years after Merkel first took power, just 2 percent of internet connections in Germany are super-fast glass fiber, the OECD estimates. That compares to 74 percent in South Korea and 75 percent in Japan.

Analysts, investors and CEO Tim Hoettges warn that, without the government as an anchor owner, Telekom could draw an unwelcome foreign takeover bid.

Telekom called off an attempt to merge its T-Mobile US unit with Sprint Corp at the weekend. With that deal off the table, concerns are turning to the risk that a large slug of Telekom shares could hit the stock market.

"This could be highly negative for the Deutsche Telekom share price in our view," Credit Suisse analyst Justin Funnell said in a note on Tuesday, adding that investors would only want to buy the shares at a steep discount.

Analysts estimate the cost of a country-wide glass-fiber internet rollout to businesses and households at 80 to 100 billion euros ($93-$116 billion) - beyond the reach of Deutsche Telekom and its competitors.

The Free Democrats want the government to commit 20-25 billion euros in subsidies through 2025, a figure the CDU views as too high.

The state owns 31.9 percent in Deutsche Telekom. However, Berlin has already raised cash against a 17.4 percent stake by transferring it to the Kreditanstalt fuer Wiederaufbau (KfW), a state development bank.

Were the KfW to sell these shares to investors it would only remit any price upside to the government.

It's a similar story with the 20.9 percent holding in Deutsche Post that has already been parked at the KfW, which does not disclose the valuation of the holdings in its books.

Merkel aides argue the public finances are strong enough to fund the internet offensive without resorting to asset fire sales. Funneling some of that cash to Deutsche Telekom would benefit the state as its main shareholder, CDU sources say.

That view is shared by a top-10 Telekom shareholder. "I should privatize when I have no money," this investor told Reuters. "Revenues are flowing, so why privatize? It makes sense for the state to keep a stake." ($1 = 0.8615 euros) (Writing by Douglas Busvine; Editing by Georgina Prodhan and Adrian Croft)