TOKYO (Reuters) - A Japanese state-backed fund and Sharp's (>> Sharp Corporation) lenders are likely to agree on a new rescue plan worth around 650 billion yen ($5.5 billion) for the struggling display maker by next weekend, sources with direct knowledge of the matter said on Friday.

The plan would represent the third bailout in as many years for Sharp which must also weigh a proposal from Apple supplier Foxconn (>> Hon Hai Precision Industry Co., Ltd.). The state-backed fund, Innovation Network Corporation of Japan, is widely seen as the frontrunner to rescue Sharp as the government would like to keep its technology in Japanese hands.

INCJ is offering to invest 300 billion yen in Sharp, while banks were expected to offer up to 350 billion yen in financing including 150 billion yen in a debt-for-equity swap, the sources told Reuters.

Taiwan's Foxconn, formally known as Hon Hai Precision Industry Co, has offered over 600 billion yen for Sharp but has not yet proposed any detailed restructuring plan for the company, the sources said, requesting anonymity because they were not authorized to talk to the media.

INCJ is planning to later merge Sharp's LCD business with rival Japan Display (>> Japan Display Inc), in which it is the top shareholder, the sources added.

The fund's top executives are expected to meet next week to confirm its participation in the bailout plan. Sharp's lenders also want to give Foxconn an opportunity to offer a more detailed proposal, the sources said.

Other sources have said INCJ is also looking at a merger of Sharp's household appliances business with that of Toshiba Corp (>> Toshiba Corp), which is eager to bolster its finances in the wake of an accounting scandal.

Sharp's main creditors are Mitsubishi UFJ Financial Group Inc's (>> Mitsubishi UFJ Financial Group Inc) core unit Bank of Tokyo-Mitsubishi UFJ, and Mizuho Financial Group Inc's (>> Mizuho Financial Group, Inc.) Mizuho Bank.

Sharp's last bailout in May provided the company with around $1.7 billion in financing, but the company has shown few signs of a turnaround due to strong pricing pressure.

Shares in Sharp rose 4 percent to 133 yen, in line with the broader market.

(Writing by Ritsuko Ando; Editing by Edwina Gibbs)

By Taro Fuse