* IPO could raise up to $2 bln - analyst

* Merchants Securities to issue up to 360 million A shares

* China IPOs set to return to normal as markets stabilise (Rewrites with details, analyst comments)

By Samuel Shen and Edmund Klamann

SHANGHAI, Nov 3 (Reuters) - China Merchants Securities Co won regulatory approval for an initial public offering in Shanghai that could fetch $2 billion, setting off a return of big IPOs to the mainland stock market after share prices stabilised.

The planned IPO, potentially the biggest in nearly two months, comes after the successful launch of China's Nasdaq-style second board last week and as the broad market gains strength after a 22 percent slump in August.

"The slump was caused partly by fears of equity oversupply," said Wei Tao, analyst at China Securities Co. "Now that the market is stabilising and the second board has been successfully launched, it's natural for regulators to start letting major IPOs come to market again."

China has seen no big IPOs since September, when Metallurgical Corp of China (MCC) (1618.HK: Quote, Profile, Research) 601688.SS raised $5.1 billion in Shanghai and Hong Kong.

Merchant Securities, a medium-sized brokerage, is proceeding with its long-delayed IPO to capitalise on a more than 70 percent rally in China's stock market this year, which followed last year's 65 percent tumble.