UPDATE 1-Japan govt: no decision on state guarantees for JAL

*Govt: no decision on if to grant guarantees to funds

*Japan considering 700 bln yen in guarantees -source

*Shares drop 2.8 pct, underperforms broader market

By Nobuhiro Kubo

TOKYO, Dec 8 (Reuters) - Japan's government has not made a decision on whether to extend guarantees to funds for struggling Japan Airlines Corp 9205.T, the transport minister said on Tuesday.

Debt-laden JAL is seeking its fourth state bailout since 2001 and has warned it could face bankruptcy unless it addresses a huge pension shortfall.

A government source said on Monday that Japan is considering guaranteeing about 700 billion yen ($7.8 billion) in loans and other funds to the airline, Asia's biggest by revenue, to prepare for a further decline in travel demand. [ID:nTOE5B601B]

Any guarantees would follow a $1.1 billion credit line JAL gained from a state-owned bank to keep it in operations until a government-backed turnaround body makes a decision in January on whether to inject public funds into the carrier.

"We haven't decided how to fund state guarantees for JAL yet, let alone the size of such potential guarantees," Transport Minister Seiji Maehara said when asked if the guarantees would be included in a planned extra budget.

According to a previous government task force estimate, JAL needs 300 billion yen in capital.

The airline will also likely receive some assistance from foreign carriers eager to gain access to JAL's network to fast-growing Asian markets and which are eyeing the expected signing this month of an "open skies" treaty that would allow for closer cooperation on routes between the U.S. and Japan.

American Airlines said last week that it and other members of the Oneworld airline alliance along with private equity fund TPG are willing to invest $1.1 billion in JAL to prevent it defecting to Delta Air Lines (DAL.N) and the rival Skyteam group. [ID:nT194302]

Delta has said that it and other SkyTeam members are ready to offer JAL a total financial aid package of about $1 billion, including a $500 million equity investment. Delta said on Thursday it may also team with a fund to sweeten its proposal.

Underscoring JAL's woes, Standard & Poor's cut its corporate credit rating to a "selective default" last week, citing a pact with creditors to freeze some loan payments under a mediated debt restructuring called Alternative Dispute Resolution.

The suspension of those debt payments has been agreed to by JAL's major creditors, giving it some breathing room while the state-backed Enterprise Initiative Turnaround Corp deliberates on whether to inject it with public funds.

Shares of JAL dropped 2.8 percent to 104 yen, underperforming a 0.4 percent decline in the benchmark Nikkei average .N225. (Editing by Edwina Gibbs)