(Adds Nissan Diesel's revised profit forecasts, updates shares)
TOKYO, April 24 (Reuters) - Nissan Motor and affiliate Nissan Diesel Motor will combine small-truck operations and could start producing two-tonne trucks in 2006, dissolving ties with Isuzu Motors Ltd, a newspaper said on Thursday.
The Nihon Keizai Shimbun report pushed the shares of ailing truckmaker Nissan Diesel up 9.9 percent to 156 yen while shares in Isuzu ended down 5.1 percent at 93 yen.
Nissan Diesel, considered one of Japan's weakest truckmakers, has been struggling to survive in a domestic truck market less than half the size it was during the bubble economy of the 1980s.
But business conditions have turned up in recent months, with sales getting a lift from replacement demand for trucks ahead of the introduction of stricter emissions standards.
Thanks to improved sales, Nissan Diesel said on Thursday it now forecast a smaller group net loss for the year that ended on March 31 -- 3.3 billion yen ($27.39 million) compared with an initial forecast of four billion yen.
Interest-bearing debt is also expected to shrink to 387.5 billion yen rather than the 395 billion yen forecast in November.
The newspaper said the two Nissan companies would jointly develop two-tonne trucks that would meet new Japanese regulations on diesel engine emissions to be introduced in 2005. Nissan Motor also has its sights set on the booming Chinese truck market.
Officials at both Nissan Motor and Nissan Diesel said nothing had been decided. But a spokesman at Nissan Motor, Japan's No.3 auto maker, said that partnership talks with Isuzu had hit a snag and that negotiations with Nissan Diesel had begun.
"Everything is up in the air," a Nissan Diesel spokesman said, adding the truckmaker had no plan to make an announcement any time soon.
The Nihon Keizai said production of the jointly developed trucks would start as early as 2006, with plans to build 200,000 to 250,000 small trucks a year globally.
Following development of that model, the Nissan group would dissolve its ties with Isuzu, which currently supplies it with 4,000 "Elf" two-tonne trucks a year, the paper said.
At present, Nissan Diesel, owned 22.5 percent by Nissan Motor, produces and sells trucks with payloads of four tonnes or more.
Shares in Nissan Motor, owned 44.4 percent by French car maker Renault , ended up 1.24 percent at 899 yen. ($1=120.46 Yen)