TOKYO (Reuters) - American Airlines is in talks to take a stake in Japan Airlines <9205.T> and to expand their business partnership, a source with direct knowledge of the matter said.

The two sides have been talking for weeks about forming closer business ties that may include a revenue-sharing agreement and joint contracts for business clients, pending the enactment of an "open skies" agreement between Japan and the United States.

"I'm not talking about hugs and kisses. I'm talking about economic value to Japan Airlines," the source said, speaking on condition of anonymity because the negotiations are not public and nothing has been decided.

Delta Air Lines <DAL.N>, the world's biggest carrier, is also in talks to invest in Japan Airlines, which has fallen deep into the red on a slump in revenue and a high cost base and is now restructuring with the help of state-backed loans.

A deal with Delta could cause headaches for American, including a possible defection by JAL to the SkyTeam network.

JAL is currently part of the Oneworld alliance along with American Airlines, British Airways <BAY.L> and others.

"We are ready to be overall competitive with Delta," the source said.

American Airlines is a unit of AMR Corp <AMR.N>.