MUMBAI (Reuters) - Walmart Inc WMT.N is in talks to buy a stake of more than 40 percent in Indian e-commerce firm Flipkart, a direct challenge to Amazon.com Inc AMZN.O in Asia's third-largest economy, two sources familiar with the matter said on Friday.

In what would be one of its biggest overseas deals, the U.S. retailer is looking at buying new and existing shares in Flipkart and due diligence is likely to begin as early as next week, the sources said. They declined to be named as the talks were private.

Terms under discussion were not immediately available, but Flipkart would be valued at more than the $12 billion figure given when Japan's SoftBank Group Corp's 9984.T Vision Fund took roughly a fifth of the firm last year for $2.5 billion, they added.

A spokesman for Flipkart said the company does not comment on rumors or speculation. An India-based representative for Walmart declined to comment.

A deal with Walmart would give Flipkart much-needed muscle in its fight against Amazon, which has committed to investing $5 billion in India as it expands aggressively, including into online grocery deliveries, which analysts tip as the next big battleground for the country’s e-commerce sector.

Besides its own e-commerce site, Flipkart owns fashion portals Myntra and Jabong, and controls nearly 40 percent of India’s online retail, ahead of Amazon, according to estimates by research firm Forrester. It is also looking into expanding into grocery deliveries.

“Walmart’s expertise in selling groceries and low-cost apparel could help Flipkart remain ahead in India’s e-commerce market,” said Satish Meena, senior analyst at Forrester.

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For Bentonville, Arkansas-based Walmart, a deal would open a new front in its efforts to take on Amazon, giving the world’s largest brick-and-mortar retailer access to an e-commerce market that Morgan Stanley has estimated will rapidly grow to be worth $200 billion in a decade.

It would be part of a huge e-commerce push that has seen Walmart acquire a slew of start-ups including paying roughly $3 billion for online retailer Jet.com. Last month it also said it was partnering with Japan's Rakuten Inc 4755.T in online grocery deliveries.

“As large as they are, Amazon has eaten away a significant chunk of their revenues and I think... they view India as the largest market possibly for this (taking on Amazon),” one of the sources said.

Walmart has for years tried to enter India but has remained confined to a ‘cash-and-carry’ wholesale business amid tough restrictions on foreign investment. It currently operates 21 such stores in India.

Walmart's push into e-commerce comes as Amazon has embraced offline retail, with an affiliate of the Seattle-based company picking up a $27.6 million stake in Indian retailer Shopper's Stop Ltd SHOP.NS.

In the United States, Amazon also bought high-end grocer Whole Foods Market Inc for $13.7 billion last year.

Former Amazon employees Sachin Bansal and Binny Bansal founded Flipkart in 2007 in India’s tech hub of Bengaluru.

Like Amazon’s founder Jeff Bezos, they began by selling books, but have diversified rapidly, including by selling smartphones such as China’s Xiaomi and Motorola through exclusive flash sales, and now compete with Amazon on almost all product categories.

Flipkart's success has attracted a bevy of deep pocketed and tech-savvy investors including U.S. hedge fund Tiger Global Management, China's Tencent Holdings Ltd 0700.HK, online marketplace eBay Inc EBAY.O and software giant Microsoft Corp MSFT.O.