Norske Skogindustrier ASA and UPM-Kymmene Oyj are in merger talks that could create the world's biggest newsprint producer, according to Swedish newspaper Dagens Industri, citing unidentified sources.

Norway's Norske Skog, the world's No. 2 newsprint maker, and Helsinki-based UPM, Europe's second-largest paper maker, have had initial contacts at the ``highest management level,'' according to the paper. Markku Franssila, head of public relations at UPM, declined to comment. Norske Skog's spokesman Paal Stensaas also declined comment.

European pulp and paper companies have been merging or buying each other to cut costs and gain market share as competition in the industry increases. The price of newsprint paper is expected to climb this year by between 10 percent and 15 percent against the backdrop of rising demand.

Norske Skog paid $2.5 billion last July to acquire the paper division of New Zealand's Fletcher Challenge Ltd. Norske Skog has about 13 percent of the global capacity for newsprint, with 21 mills on five continents.

UPM ranks No. 5 worldwide in newsprint sales, with plants in Finland and the U.K. After two failed merger attempts in Asia and the U.S., UPM last year bought Canada's Repap Enterprises Inc. for $910 million to boost its position in North America.

UPM became Europe's biggest paper company through a 1996 merger but dropped to No. 2 in 1998 after the $5.2 billion merger between Sweden's Stora Kopparberg Bergslags AB and Finlands Enso Oyj, which created Europe's biggest paper maker. Bloomberg.