Sources told Reuters on Tuesday that an outright sale of the company is not the main option, and other choices could include a sale of its portfolio of patents.

The company's stock surged 18 percent on the news before ending up 5 percent at $2.09 on the New York Stock Exchange. The shares slipped further to $2.07 in extended trade after AMD said it was "not actively pursuing a sale of the company or significant assets at this time."

"AMD's board and management believe that the strategy the company is currently pursuing to drive long-term growth by leveraging AMD's highly-differentiated technology assets is the right approach to enhance shareholder value," spokesman Drew Prairie said in an email to Reuters.

When asked why AMD had hired JPMorgan, Prairie declined to confirm the engagement, saying the company does not comment on its relationship with investment banks.

A JPMorgan spokeswoman declined to comment.

One of Silicon Valley's oldest chipmakers, AMD is laying off engineers and some analysts are concerned it may not find new markets for its chips in time to reverse a declining cash reserve.

AMD's shares have fallen more than 60 percent this year, giving it a market value of about $1.4 billion. It also has long-term debt and capital lease obligations of about $2 billion.

Since the 1980s, AMD has competed with much larger Intel and at times has made inroads with its PC and server chips. But setbacks at AMD limited those gains and AMD now faces new competition from companies designing low-cost and power-efficient chips based on ARM Holdings' technology.

Like Intel, Sunnyvale, California-based AMD was caught flat-footed in recent years with the emergence and fast growth of mobile devices.

But while Intel has deep pockets to fund research on new products to catch up, AMD faces declining cash flows and a more modest balance sheet.

EMULATE APPLE

Some investors believe part or all of AMD could be bought by a technology company that might want to emulate Apple Inc's tight control of software and components, a strategy credited in part for the success of the iPad and iPhone.

One source described AMD as a "legacy company" and said it might prove difficult to sell because of its dependence on the PC industry and lack of strong mobile offerings.

Another source said AMD's game console chip and embedded chips businesses were growing and attractive.

Microsoft Corp, Google Inc, Samsung Electronics, Intel Corp and even Facebook Inc have been suggested by Wall Street analysts as potential suitors that could benefit from some of AMD's chip business, including its graphics division, PC processors and server chips.

Others say AMD's most valuable asset may be its deep bench of engineers or its patents.

Goldman Sachs analyst James Covello estimated in a recent note to clients the chances of AMD's PC processor business being sold are between 15 percent and 30 percent.

Rather than selling AMD, bankers could help the chipmaker strengthen its finances in order to acquire technology it believes it needs to tackle new markets, said Williams Financial analyst Cody Acree.

"Right now they don't have the currency on their balance sheet or their share price to make an acquisition (of another company) viable," Acree said.

UNDERESTIMATED CHANGE

Rory Read took over as AMD's CEO in 2011 promising to fix long-standing execution problems that have plagued the chipmaker. But AMD has continued to lose money as well as market share to Intel and graphic chip rival Nvidia.

AMD said last month it would slash 15 percent of its workforce, while devoting more resources to areas outside of its traditional PC business, including communications, industrial and gaming applications.

Last week, AMD said it added a second board member from its leading shareholder, Mubadala Development Co, which owns 15 percent of the chipmaker.

In October, Read told analysts on a conference call he had underestimated the speed of change in the PC industry and said AMD would move quickly to focus on selling chips for communications, industrial and gaming applications.

AMD recently announced it has licensed technology from ARM and will use it to build low-power chips for servers. But those products aren't expected to launch until 2014 and AMD is one of several companies vying for a microserver market that will be small compared to traditional servers that power most data centers.

With the company burning through cash, analysts have recently become concerned about future liquidity and say AMD needs to turn its business around sooner than later.

AMD's cash declined $279 million in the third quarter to $1.48 billion. AMD said it was reducing its "optimal" cash target to $1.1 billion from $1.5 billion due to the business' now smaller size.

(Reporting by Nadia Damouni and Noel Randewich; Editing by Paritosh Bansal, Gary Hill and Bernard Orr)

• A Permanent Economic Emergency