UPDATE 1-Xstrata sticks to nil-premium merger with Anglo

* Xstrata says proposal remains nil premium merger of equals

* Paper says Xstrata to offer up to 5 bln stg deal sweetener

* Says Xstrata to raise further cash via rights issue

(Recasts with Xstrata comment)

By Rhys Jones

LONDON, July 12 (Reuters) - Mining group Xstrata Plc (XTA.L) remains committed to a nil-premium merger with Anglo American (AGLJ.J) (AAL.L), the company said on Sunday after a newspaper said it will offer a 5 billion pounds ($8.1 billion) sweetener to seal the deal. The Observer newspaper cited sources as saying Xstrata would raise the money via a rights issue because its debt-laden balance sheet had made it difficult to justify further borrowings.

But Xstrata said in a statement sent to Reuters its proposal "remains a nil premium merger of equals, in which both companies' shareholders will share equally the substantial benefits that are uniquely available from a merger."

It added "the proposal bears none of the characteristics of a takeover, in which a premium would typically be payable."

Anglo's shareholders are in favour of a merger deal in principle but want better terms than the nil-premium, all-share merger that Xstrata proposed in June, the Observer said.