The two companies will issue a joint statement later this week, Hon Hai spokesman Simon Hsing told Reuters on Tuesday.

"A bigger stake and price cut are both being discussed, but we need to do it step by step," he said. "We first need to work on a joint statement to tell investors whether we need to honor the original obligation."

Hon Hai agreed in March to buy an 11 percent stake in Sharp for $844 million, or 550 yen per share, as part of a tie-up in liquid-crystal display (LCD) production. But Sharp's shares have fallen by nearly two-thirds since that deal was announced, trading at 183 yen on Tuesday. At Sharp's current market value, a 66 billion yen ($843.56 million) investment could buy Hon Hai a third of its stock.

Hon Hai said on Friday that Sharp had released it from the terms of the original deal because of the share price volatility, but Sharp insisted on Monday it expected the Taiwanese firm to stick to the deal. Sharp declined to comment on Tuesday.

Analysts have said Sharp will likely have to accept less money from Hon Hai or sell a bigger stake to the Taiwanese firm and give it greater management say that may see TV assembly plants closed and solar panel and appliance units sold off.

Barclays Capital analyst Kirk Yang has predicted Hon Hai would buy around a tenth of Sharp, but at a renegotiated price of 200-300 yen per share.

Battered by foreign competition and waning demand for its TVs, and too few customers to buy its LCD panels, Sharp's shares have slumped this year and the cost of insuring its debt against default has widened alarmingly.

Sharp, which pioneered LCD televisions and invented the electronic calculator, is relying for backing on its main banks, Mizuho Financial Group (8411.T) and Mitsubishi UFJ Financial Group (8306.T). A source at one of Sharp's main banks told Reuters those lenders may insist on closer ties to Hon Hai and the sale of non-LCD businesses to raise cash in return for help.

The century-old company warned last week of an operating loss of 100 billion yen ($1.28 billion) for this fiscal year, prompting Moody's and Standard & Poor's to cut their credit ratings. Rival Fitch warned that Sharp could lose investment-grade status unless a planned restructuring succeeds.

($1 = 78.2400 Japanese yen)

(Reporting by Clare Jim in TAIPEI and Tim Kelly in TOKYO; Editing by Ian Geoghegan)

• A Permanent Economic Emergency