UPDATE 3-SoftBank-backed Banco Inter and StoneCo in talks on potential merger -source

(Adds details on losses, updates shares)

By Carolina Mandl

SAO PAULO, Sept 24 (Reuters) - SoftBank-backed digital lender Banco Inter SA and payments company StoneCo Ltd are in preliminary talks to expand a current partnership agreement, including a potential merger, one source familiar with the matter said.

StoneCo acquired a 4.99% stake in Banco Inter in June, as part of a strategy of attracting the bank's clients to its payments services.

The talks are the latest sign of stepped-up dealmaking involving a new breed of financial companies that have emerged as rivals to Brazil's once-dominant traditional lenders.

The current talks come as StoneCo faced a 400-million-real ($75 million) loss in its newly-launched lending operation due to higher provisions.

If StoneCo and Banco Inter agreed on a merger, it would create a financial institutional with a market capitalization of roughly $22 billion.

Both U.S.-listed Stoneco, which has a market value of $12.5 billion, and Banco Inter, with a $9.8 billion market cap, said they do not comment on rumors.

Under their existing partnership, Inter offers Stone's processing services to its clients and merchants who use Stone to process credit and debit cards are being offered connections to Inter's nascent online marketplace. It was unclear what a deeper partnership absent a merger might involve.

Brazilian newspaper Valor Economico reported earlier on Friday on the talks.

Shares in Banco Inter were up 0.8% in early afternoon trading, after rising more than 4%, while shares in StoneCo were up 0.1%.

($1 = 5.3365 reais) (Reporting by Carolina Mandl, additional reporting by Tatiana Bautzer; Editing by Emelia Sithole-Matarise and Nick Zieminski)