(Corrects paragraph 3 to change the name of brokerage to Credit Suisse, not Nomura Research Institute)

* Shinsei Banks shares jump 12.1%, Aozora Bank up 16.1%

* Analyst says public funds also needed by loss-making banks

TOKYO, April 27 (Reuters) - Shares in Shinsei Bank (8303.T: Quote, Profile, Research) and rival Aozora Bank (8304.T: Quote, Profile, Research) soared more than 10 percent on Monday after sources said the two loss-making lenders were in merger talks to form Japan's sixth-biggest lender.

The banks, bought by overseas investors from the government after Japan's banking crisis in the 1990s, have fallen on hard times again thanks to losses on risky investments in the current global financial crisis.

Two people with knowledge of the matter said on Saturday the banks had been discussing a merger but Shinichi Ina, research analyst at Credit Suisse, said the government would also need to get involved.

"Another injection of public funds is an extremely important factor," Ina wrote in a note to investors.

He cited a shortfall in deposits, Shinsei's exposure to consumer lending and Aozora's exposure to securitised products and investment fund-related assets.

Aozora shares jumped by their daily limit of 37 percent to a six month high of 162 yen before falling back to 137 yen, a gain of 16.1 percent.