UPDATE 1-Xstrata CEO: nil-premium mergers can be difficult

* Xstrata's Davis says constrained in talking about Anglo

* Says scale and diversity key to future value in sector (Adds details, background)

By Eric Onstad

LONDON, June 29 (Reuters) - The head of mining group Xstrata (XTA.L) , which has made a "merger-of-equals" proposal to rival Anglo American (AAL.L), said "nil-premium" mergers may not be possible without the cooperation of the intended partner.

Anglo has rebuffed the proposal and investors have been speculating whether Anglo-Swiss Xstrata would be willing to offer a premium.

Xstrata Chief Executive Mick Davis said on Monday during a speech he was constrained by lawyers over how much he could say about the Anglo situation.

Davis strongly defended the concept of nil-premium mergers as creating value for both sides, but this was not always possible.

"It might not happen very often and you might not be able to do it if the other party doesn't want to play with you," he told a dinner of the Melbourne Mining Club in London.

Davis said scale and diversity are key to future value creation in the mining sector.