NEW YORK, (Reuters) ? Intelsat Ltd., the world?s No. 2 communications satellite operator, is in talks to acquire smaller rival New Skies Satellites Holdings Ltd., a source familiar with the matter said on Friday.

Earlier reports of the talks sent New Skies shares up as much as 16 percent.

The talks have been going on for several weeks and could yet fall apart, the source said.

Citing people familiar with the matter, The Wall Street Journal said Bermuda-based Intelsat was in talks to buy New Skies for as much as $1.3 billion.

A deal would kick off another wave of consolidation in the satellite sector, which has been rife with merger activity over the past three years.

According to Wachovia analyst Jeff Wlodarczak, the reported price implies a deal worth $25 to $26 per share ? a premium of 22 percent to 27 percent over New Skies? closing stock price Thursday.

?The final price could end up higher,? Wlodarczak said. He said the deal makes sense because it would create opportunities for savings and the reported price was attractive for both players.

?We would be surprised if a transaction is not consummated,? Wlodarczak said in a note to clients.

While he said a competing bidder could emerge, Wlodarczak said Intelsat is the most logical buyer.

The potential combination would catapult Intelsat, based in Bermuda but with headquarters in Washington, closer to Luxembourg?s SES Global SA, which has the largest, most geographically diversified satellite fleet, the report said.

The combined entity would have 33 spacecraft in orbit, including five relatively young New Skies satellites designed to serve emerging international markets for video, Internet and data.

That compares with 35 that SES operates.

Dutch-based New Skies, which Blackstone Group acquired for about $1 billion last November, told Reuters in a statement that its policy was not to comment ?on strategic activities before they reach the stage where disclosure is required.?

Tony Trujillo Jr., Intelsat?s senior vice president for government relations, was not immediately available to comment.