By Ben Hirschler and Paul Sandle

LONDON (Reuters) - Artificial knee and hip maker Smith & Nephew <SN.L> said on Friday it was not in talks on a merger or takeover, after a report it was weighing a deal with privately owned U.S. rival Biomet sent its shares higher.

Speculation of a deal involving Biomet, which the Daily Telegraph said would be structured as a merger, followed an earlier report that a 7 billion pounds ($11 billion) bid from Johnson & Johnson <JNJ.N> had been rejected last month.

The British company has been tipped as a target for some time, although industry analysts say a takeover by a large U.S. rival like Biomet or J&J could run into antitrust issues.

Shares in Smith & Nephew (S&N), which hit a record high of 739 pence on Monday after the report of the J&J bid, initially jumped as much as 4.6 percent on Friday on the Biomet merger report. The stock retraced to stand just 0.4 percent higher by 6:35 a.m ET after S&N's statement.

"Smith & Nephew has a long standing policy of not commenting on press speculation, unless there is a regulatory obligation to do so," the company said in a short release.

"However, exceptionally, Smith & Nephew wishes to clarify that it is not engaged in any discussions which could lead to a merger or a takeover involving the company."

The Daily Telegraph said privately owned U.S. orthopedics group Biomet was set to begin informal talks about a potential 15 billion pounds merger, without citing sources.

Investec analyst Seb Jantet, who moved to a "hold" from "buy" after the price spiked on Monday and no deal materialized, said a merger with Biomet was less attractive than a potential cash bid.

"The positive is it gives them scale in the orthopedics market and there will be some cost savings, although those would be difficult to quantify at this stage," he said.

"The bad news for shareholders is you massively increase the gearing levels of the group to take on all of Biomet's debt."

Jantet also said a merger would rule out a takeover from a larger rival on competition grounds, removing the premium from the stock, and it would also focus the group on orthopedics, the slowest-growing part of the business.

Scale is becoming increasingly important in orthopedics as hospitals consolidate suppliers to reduce costs -- and S&N's Chief Executive David Illingworth said this week there would be consolidation in the industry.

"Customers are going to want to deal with companies that have a thoughtful, broad range of products and services," he said at the J.P. Morgan Healthcare Conference in San Francisco on Monday.

(Editing by Hans Peters)