* Wal-Mart in talks to buy up to $1 bln stake in Flipkart
* Deal would give Wal-Mart a toehold in Indian online market
* Flipkart facing growing competition from Amazon
* Profitability still a worry in India's online sector (Updates with background on Snapdeal's investors; tweaks quote)
MUMBAI/HONG KONG, Sept 29 (Reuters) - Wal-Mart Stores Inc is in talks to buy a minority stake in India's largest e-commerce firm Flipkart, two people familiar with the matter said, as the world's biggest retailer aims to break into a fast growing but highly competitive online retail market.
One of the sources said the U.S. retailer was looking to invest between $750 million and $1 billion in Flipkart, but the final value and size of the stake would depend on the outcome of talks about the Indian company's overall valuation.
A deal would pit Wal-Mart against U.S. rival Amazon.com Inc , which has been expanding rapidly in a market that Bank of America Merrill Lynch has forecast will surge to $220 billion in value of goods sold by 2025 from about $11 billion last year.
Wal-Mart operates 21 wholesale stores in the South Asian country, but is discouraged from setting up its own bricks-and-mortar shops by rules that limit foreign ownership for multi-brand retailers to 51 percent and the cost of setting up shops in a country as large as India.
For Flipkart, a cash infusion from Wal-Mart would come in handy at a time when funding from traditional investors into the online space such as venture capital is proving harder to obtain amid worries about valuations in India.
Kashyap Chanchani, managing partner of the Rainmaker Group, a Mumbai-based tech and digital media investment banking firm, said it was natural for Wal-Mart to want to partner with Flipkart.
"India does not lend itself to big box retail since rentals are very very expensive," he said.
If a deal is agreed, Wal-Mart would join other foreign strategic investors in India's online players. China's Alibaba Group Holding, Japan's SoftBank Group Corp and Taiwan's Foxconn last year led an investment of $500 million in Flipkart's smaller rival Snapdeal.
Alibaba is also the biggest shareholder in India's One97 Communications, which operates payments services and an e-commerce market place under the PayTM trade name.
The sources declined to be identified because the talks are preliminary and have not been made public. Wal-Mart in India and Flipkart declined to comment.
Launched in 2007 by two former Amazon employees, Flipkart sells everything from cellphones to suitcases and cosmetics. Its current investors include Tiger Global Management and Accel Partners.
A Wal-Mart bet on Flipkart would come at a time when Amazon is planning an aggressive expansion into India.
Jeff Bezos, the chief executive of the online retailer, said in June it would invest an additional $3 billion in India after investing $2 billion already, and has recently rolled out its Prime membership service in the country.
Bank of America estimated Amazon could increase its market share to 37 percent by 2019 from 31 percent now, approaching the 44 percent held currently by Flipkart.
But concerns about profits continue to weigh on the sector, as severe competition is forcing the online retailers to resort to heavy discounts while they also need to invest in infrastructure such as warehouse centres.
Indian brokerage Kotak estimated Flipkart, Amazon and Snapdeal lost a combined 50 billion rupees ($751.46 million) in the year ended in March 2015.
The online retailers do not disclose financial data but analysts say losses likely have increased since then.
Flipkart has been valued at about $11.5 billion, local media reported last month, citing a U.S. regulatory filing from investor Valic, a division of American International Group Inc , down from as much as $15 billion earlier this year.
Wal-Mart agreed in June to take a 5 percent stake in China's JD.com Inc, giving the U.S. firm a ringside seat in JD.com's bitter rivalry with Alibaba Group. ($1 = 66.5375 Indian rupees) (Reporting by Devidutta Tripathy and Promit Mukherjee in MUMBAI and Sumeet Chatterjee in HONG KONG; Writing by Rafael Nam; Editing by Muralikumar Anantharaman)