UPDATE 3-Polyus Gold denies in talks with global gold miners

* Polyus board member says merger discussions not happening

* Co-owner Prokhorov has said deal possible by end-2011

* Polyus in talks with Newmont, Newcrest, Ashanti - paper

* Western miners wary of investing in Russia - analysts (Adds further analyst comment, detail)

By Polina Devitt and Alfred Kueppers

MOSCOW, June 3 (Reuters) - Polyus Gold (PLZL.MM: Quote) (PLZLq.L: Quote), Russia's biggest gold producer, is not in merger talks with three overseas rivals, board member Evgeny Ivanov told Reuters, denying a Russian newspaper report on Friday.

"Negotiations about a merger with Newmont Mining Corp (NEM.N: Quote), Newcrest Mining (NCM.AX: Quote) and AngloGold Ashanti (ANGJ.J: Quote) are not happening," he said.

A separate source close to Polyus said the company held talks with both Newcrest and AngloGold three or four years ago, but had since had only occasional discussions.

Polyus's co-owner and chief executive Mikhail Prokhorov said last month he was seeking an international merger partner for Polyus and was hoping to complete a deal by the end of the year. [ID:nLDE74J0GE]

Prokhorov, Russia's third-richest man, with a fortune estimated at $18 billion by Forbes magazine, has long talked about putting Polyus on the global stage via a merger with a multinational player.

And the company recently resolved a long-running legal dispute with owners of another partner, Kazakh Gold (KZGq.L: Quote).

Prokhorov owns a majority stake in Polyus alongside Suleiman Kerimov, the potash tycoon who masterminded the merger of miners Uralkali (URKA.MM: Quote) and Silvinit earlier this year.

Kerimov is an ally of Russian Prime Minister Vladimir Putin, whose approval for a Polyus deal would be required under a 2008 law on foreign investment in strategic sectors of the economy.

EXCEPTIONALLY HARD

Vedomosti newspaper, citing sources close to shareholders, said Polyus was looking to combine with Newmont or Newcrest to create the world's second biggest gold miner by capitalisation, while a merger with AngloGold would create the world's third or fourth largest gold miner.

A spokesman for AngloGold declined to comment.

Polyus shares were up 0.34 percent at 2,001.7 roubles by 12O4 GMT.

Analysts said western gold miners would be wary of Russia due to the perceived political risks of investing there. No major overseas gold miner has entered the market before, making it hard to gauge the likelihood of such a move.

"This would be a good step for Polyus but it will be exceptionally hard for the company to complete a deal," VTB Capital analyst Igor Lebedinets told Reuters.

"It makes sense for overseas players to access Polyus's cheap reserves but there are operational risks ... It would be a big risk for them to come into Russia, given they have never done business here," he added.

South Africa's big gold miners such as AngloGold Ashanti are trying to diversify away from the country as grades at home dwindle and regulatory uncertainty, nationalisation talk and labour unrest weigh on their shares.

But one analyst said buying into a company trading at a discount to its peer group would not solve the problem.

"From a South African perspective it (a deal with Polyus) helps to expand their offshore base but it doesn't help expand the valuation multiple which is really the objective," said Leon Esterhuizen, an analyst at RBC Capital Markets in London.

Merger speculation has pushed up Polyus' valuation so it is trading at a price to earnings ratio of 18.7 times, compared to 13.5 times for its gold mining major peer group, according to analysis by VTB Capital.

Its Russian peer group trades at 9.1 times.

POLITICAL AMBITIONS

Prokhorov has earned a reputation as a shrewd deal maker, selling his stake in Norilsk Nickel (GMKN.MM: Quote), the world's largest miner of the metal, before the financial crash of 2008.

He also recently announced he will enter politics, seeking election as leader of Right Cause, a liberal opposition party that has no parliamentary seats, ahead of lower house elections towards the end of this year. [ID:nLDE74F0U7]

His decision will test an unwritten rule of Russian public life that has prevailed since Putin became president in 2000: That business oligarchs can keep their assets as long as they stay out of politics.

Polyus ranks as the world's eighth largest gold producer in terms of market capitalisation, with a current value of $13.6 billion.

The company produced 1.386 million ounces of gold in Russia last year, compared with a 2011 global output target of 7.6-8.0 billion at world leader Barrick Gold (ABX.TO: Quote). [ID:nN17277324]

It has mines or exploration projects in five Russian regions as well as Kazakhstan, Romania and Kyrgyzstan.

(Additional reporting by John Bowker in Moscow and Ed Stoddard in Johannesburg; Writing by John Bowker; Editing by Jon Loades-Carter, Greg Mahlich)