(Updates with bourse close)

By Manuel Farias

SANTIAGO, May 28 (Reuters) - Chilean stocks closed sharply higher on Thursday, led by retail shares as La Polar LAP.SN received a merger offer and underpinned by gains on Wall Street, while the peso closed flat, traders said.

The blue-chip IPSA index .IPSA rose 1.55 percent to 3,102.26 points, preliminary closing data showed, closing back in on near-18-month highs hit earlier in the week, while the all-market IGPA index .IGPA gained 1.18 percent to 14,604.09 points.

Chile's bourse has risen sharply in the past few weeks, led by sectors such as construction, retail and commodities. The IPSA is up 30.5 percent year-to-date.

La Polar LAP.SN said in a statement to Chile's market regulator that the proposed merger would be with a supermarket chain called Omega, which is controlled indirectly by the private equity fund Southern Cross Latin America, sending its shares surging 15.2 percent to 1,945.60 pesos a share.

"The proposed merger between La Polar and the supermarket unit of Southern Cross ... boosted the share sharply as well as some other retail stocks," he said Diego Celedon, deputy director of research at the Banchile brokerage.

Shares in retailer Falabella FAL.SN rose 2.39 percent to 2,193 pesos, while fellow retailer Ripley RIP.SN surged 6.66 percent to 395.17 pesos a share.

Shares of Cencosud CEN.SN, one of Latin America's largest retailers, rose 1.09 percent to 1,434.70 pesos.