LONDON, August 3, 2008 (AFP) - British electricity and gas supplier Centrica is mulling a merger with British Energy, after French peer EDF walked away from a deal for the nuclear power operator, a newspaper report said on Sunday.

The Sunday Telegraph, which quoted an unnamed source close to the company, said it was sounding out institutional investors about a possible all-shares merger. Centrica was unavailable for comment on the story.

A combination of British Energy and Centrica would have a stock market value of 22.5 billion pounds (28.5 billion euros, 44.4 billion dollars), according to their closing share price levels before the weekend.

British Energy faces an uncertain future after talks collapsed on Friday about a potential multi-billion-pound takeover from Electricite de France (EDF), which is the biggest nuclear power generator in the world.

Centrica would have taken a minority stake in British Energy as part of EDF's ditched takeover plans.

The Sunday newspaper added that Centrica would not pursue a merger without the backing of shareholders and the government.

The company, which owns British Gas, had suggested a merger to British Energy's management at the start of the year, but investors had been keen to pursue a cash takeover offer, it said.

Britain's government owns 35 percent of British Energy but wants to sell its stake. The partly-privatised group provides almost one fifth of the nation's electricity and owns eight nuclear power stations.

Prior to last Friday, EDF, Europe's number one electricity producer, had been widely regarded by analysts as the favourite to buy British Energy.

According to various media reports, EDF's bid -- pitched at 765 pence per share or 12.0 billion pounds -- failed because it was rejected by two key institutional investors that wanted more cash.

The breakdown of talks was a major blow to the government's plans to fund new nuclear reactors by selling its sizeable stake.

The Observer newspaper, which did not cite its source, said Sunday that EDF had not given up hope of buying British Energy.

The Sunday Telegraph added that the French state-owned company was still reeling from its rejection but could come back with a higher offer above 800 pence per share.