MADRID (Reuters) - Spain's Telefonica (>> Telefonica SA) is in talks to refinance about 5 billion euros ($6.8 billion) of debt maturing in 2015, sources said on Friday, a move that would boost its financial muscle ahead of possible acquisitions, particularly in Brazil.

One of Europe's most heavily indebted telecoms operators is negotiating with creditors to lower the cost and extend the maturity of a 3 billion euro loan, three sources with direct knowledge of the deal said, confirming a report in Spanish business daily Expansion.

It is also studying paying off up to another 2 billion euros of debt with proceeds from the sale of its Czech business.

The sources could not confirm, however, that the debt would be refinanced at a price of 85 basis points above the Euribor rate from 110 basis points currently, as Expansion wrote.

A source close to the matter said the pricing of the new syndicated loan, which could take weeks to be agreed, would likely not be so favourable for Telefonica.

Telefonica declined to comment.

The Spanish group sold a series of assets in 2012 and 2013 aimed at reducing debt and improving credit ratings which Moody's have at Baa2, two notches above junk.

Its debt at the end of September was 46.1 billion euros, meeting a year-end target to get it below 47 billion euros three months ahead of time, and its leverage ratio - debt to operating income - was 2.3 times, also below a goal of 2.35.

While these metrics have dramatically improved since early 2011, when the firm launched a debt-cutting plan and temporarily scrapped its dividend, potential leeway for an acquisition in Brazil or Europe is still limited, analysts say.

"Telefonica has done a very good job over the last 18 months in terms of deleveraging but we still have a negative outlook on their ratings," said Carlos Winzer, Moody's analyst.

"This negative outlook means that there is a limited headroom for additional debt that the company can currently absorb. If they were to engage in consolidation anywhere, they would have to be very prudent on how they structure any deal."

Sources told Reuters in November Telefonica could launch a bid for TIM Brasil (>> TIM Participacoes SA), a unit of Telecom Italia (>> Telecom Italia SpA) which the Spanish group indirectly controls.

The company is also monitoring closely the likely consolidation of its Spanish home market, where it is struggling to reverse declining revenues as cash-strapped customers cut back on telecoms spending amid economic hardship.

(Reporting by Julien Toyer and Tracy Rucinski in Madrid and Alasdair Reilly in London; Editing by Kenneth Maxwell; and Mark Potter)

Stocks treated in this article : Telefonica SA, Telecom Italia SpA, TIM Participacoes SA