UPDATE 1-Virgin's Branson may launch Brazil airline--report

(Adds Virgin did not return comment, Brazil market growth)

SAO PAULO, June 24 (Reuters) - British billionaire Richard Branson is in talks with Brazilian partners to start an airline in Latin America's largest country, the Agencia Estado news service said on Tuesday.

The airline would be a kind of "Virgin Brazil" and would start out with domestic flights, although it may later expand with international destinations, Branson said on the outskirts of the Global Humanitarian Forum in Geneva, according to Agencia Estado.

"Brazil is a very dynamic market and we haven't paid enough attention to it in the past," said Branson, who controls Virgin Atlantic Airways [VA.UL]. "We know there is a lot of room to grow given the country's size and the need to develop the air transportation system for Brazil's own growth."

Branson said the talks are ongoing and he expects an announcement soon, Agencia Estado said.

Virgin Atlantic did not immediately return e-mail and phone requests for comments on Branson's Brazil plan.

Brazil's civil aviation laws cap foreign ownership of domestic airlines at 20 percent.

Branson's carrier would face competition from large rivals TAM Linhas Aereas (TAMM4.SA)(TAM.N) and Gol Linhas Aereas (GOLL4.SA)(GOL.N), which together command almost 90 percent of Brazil's domestic aviation market. JetBlue Airways Corp (JBLU.O) founder David Neeleman also announced plans to launch a Brazilian airline early in 2009.

But with the Brazilian economy booming and air travel expanding annually at a double-digit pace, the new airlines are betting there is plenty of room for new players in a market where travelers have few options. (Reporting by Elzio Barreto; Editing by Andre Grenon)