(Adds DST denial of investment in Xiaomi)
SHANGHAI, June 5 (Reuters) - Chinese smartphone maker Xiaomi Technology is in the process of closing a fundraising round that will value it at $4 billion - almost half of Nokia's market capitalization - a source with direct knowledge of the matter said.
Xiaomi, which sells smartphones at a fixed 1,999 yuan ($310), announced last month that sales of its Xiaomi flagship phone had reached 1.8 million units since sales started in September last year. Its phones are sold primarily online.
Xiaomi's latest fundraising round is in the final stages, said the source, declining to give further details. The source declined to be named because the information is not yet public.
Local media, which first reported the $4 billion potential valuation, also reported on Tuesday that Russia's Digital Sky Technologies may be an investor in the latest funding round.
But a spokesman for DST said the firm has never invested in Xiaomi.
The source declined to confirm the investors or the amount being raised because it was still in the closing stage.
"Yes it's $4 billion," the source replied in answer to a question about the potential valuation. "They are currently in the final stages of closing the fundraising."
A company spokeswomen declined to comment.
Local media reported late last year that Xiaomi received $90 million in B-round venture capital funding from investors such as IDG Capital, Temasek Holdings and Qualcomm Inc , valuing the firm at $1 billion and bringing the total amount it raised to $131 million.
A $4 billion valuation for Xiaomi would put it close to embattled Blackberry maker Research in Motion's market capitalization, which is now valued at $5.4 billion.
Xiaomi, whose name literally means millet but refers to a revolutionary idiom from the early days of the Chinese Communist Party, was founded in 2010 with a focus on becoming a mobile Internet company.
Xiaomi's president told Reuters in February the firm was looking to raise funds within the next year or two to boost production and saw revenue in the future coming from software applications.
China is the world's largest Internet and mobile market by users. But competition in the smartphone segment is cut-throat with Samsung Electronics, Apple Inc, Taiwan's HTC Corp and local firms Huawei Technologies Co Ltd and ZTE Corp all vying for market share. ($1 = 6.3645 Chinese yuan) (Reporting By Melanie Lee; Additional reporting by Anastasia Teterevleva in Moscow; Editing by Muralikumar Anantharaman and Jon Loades-Carter)