Toshiba Corp. is in talks to merge part of its chip operations with the semiconductor unit of NEC Corp., a person with knowledge of the negotiations said, as they struggle with slumping demand and prices.

The talks will likely focus on Toshiba spinning off its system chip operations and merging them with NEC Electronics Corp., a semiconductor maker owned 65 percent by NEC Corp., the person said, who spoke on condition of anonymity because the talks are not public.

Semiconductor makers have been hit by fierce competition and tumbling prices, while the global recession has added to their woes by weakening demand.

A Toshiba spokesman declined to comment.

Toshiba's chief executive, Atsutoshi Nishida, said on Thursday that too many chip makers, especially those who make system chips, are fighting it out in Japan and that they need to consolidate to win globally.

He said Toshiba, which is facing a record operating loss this business year, would consider spinning off its system and discrete chip operations.

NEC Electronics said in a statement that each company must prioritize operational reforms for the revival of the chip industry, and that it would push forward with its own restructuring steps including cutting costs by $890 million over two years and eliminating 1,200 contract jobs..

The Nikkei business daily said NEC has been talking with Fujitsu Ltd. as well about a merger of their chip-making operations.

Fujitsu has been looking for partners and other ways to turn around its chip operations, but a spokesman said nothing had been decided. He said he was checking on whether talks with NEC were being held.

In early trade on Friday, Toshiba shares were awash with sell orders at ¥350, down 9.1 percent from Thursday's close. NEC dropped 5 percent to ¥249 and NEC Electronics was up 0.3 percent at ¥608.

Fujitsu shares were down 4.5 percent at ¥422.