UPDATE 2-Air Berlin in talks to merge leisure airline unit with TUIfly

(Corrects third paragraph to read "...leased from TUIfly... instead of "operated on behalf of TUIfly...")

* Air Berlin (LSE: 0GPE.L - news) in talks with TUI (LSE: 0NLA.L - news) , Etihad

* Move seen as major restructuring step

* Shares (Berlin: DI6.BE - news) up 3.2 percent

FRANKFURT/ABU DHABI, Oct (HKSE: 3366-OL.HK - news) 5 (Reuters) - Lossmaking Air Berlin , Germany's second biggest airline, is in talks to merge its leisure travel business with that of travel and tourism giant TUI's German airline TUIfly, the airline said on Wednesday.

Air Berlin, which has made a net loss in seven of the last eight years, is trying to expand its long-haul operation and attract more higher-paying business customers.

It said on Wednesday it was joining talks between major shareholder Etihad and TUI about the combination with TUIfly of Air Berlin's tourist business, which has 35 aircraft including 14 already leased from TUIfly.

Shares in Air Berlin were up 3.7 percent at 0.71 euros by 0830 GMT, when TUI's London-listed shares were down 0.6 percent at 1127 pence.

In a separate statement Etihad Aviation Group, which holds 29.2 percent of Air Berlin, confirmed its was in talks with TUI "to create a strong European leisure airline group, focused on point-to-point flying to connect key tourist markets".

"This new airline group would serve a broad network of destinations from Germany, Austria and Switzerland," it added.

Industry sources had told Reuters last week that Air Berlin was in talks over a broad restructuring that could halve its fleet and cut 1,000 mainly sales and marketing jobs to shore up its finances and restore profitability.

"The prospective transaction will be subject to successful negotiations and to all necessary corporate and regulatory approvals," Air Berlin said. (Reporting by Harro ten Wolde and Christoph Steitz and Stanley Carvalho.; Editing by Jane Merriman and Georgina Prodhan)