UPDATE 2-Shinsei Bank, Aozora Bank launch merger talks-Nikkei

(Adds that Flowers not available for comment, paragraph 6)

April 25 (Reuters) - Japan's Shinsei Bank (8303.T) and Aozora Bank (8304.T) have entered into negotiations to integrate their operations in the summer of 2010, the Nikkei business daily reported without citing sources.

The banks have combined assets of over 18 trillion yen ($185 billion) and a merged entity would oust Chuo Mitsui Trust Holdings Inc (8309.T) as the No. 6 bank in Japan, the paper said.

The banks are seeking approval of their top shareholders, both of which are U.S. investment funds, the paper said.

J.C. Flowers & Co owns 33 percent of Shinsei and Cerberus Capital Management [CBS.UL] has a more than 50 percent interest in Aozora, the paper said.

The Japanese government, which owns common shares in Shinsei and preferred stock in Aozora, is expected to welcome a merger, but a disapproval by the U.S. investment funds could potentially sink the deal, the paper said.

Cerberus declined to comment. Christopher Flowers, who runs J.C. Flowers, was not available for immediate comment.

The banks likely suffered net losses for the fiscal year ended March 31, the paper said.

Shinsei and Aozora have been hit by bad bets on U.S. subprime loans and other overseas investments.