By Makiko Yamazaki and Tamiyuki Kihara

TOKYO, March 9 (Reuters) - Tokyo and Washington are looking at building a display factory in the U.S. in partnership with Japan Display 6740.T as part of Japan's planned $550 billion investment package, two sources with knowledge of the matter said on Monday.

The plan is aimed at strengthening U.S. display manufacturing amid Washington's concerns over reliance on China for display technologies used in military systems at a time when fierce price competition has pushed most Japanese manufacturers out of the market.

Japan Display declined to comment. Its shares surged 80% on Monday, valuing the long loss-making company at 190 billion yen ($1.2 billion).

The news was first reported by Nikkei Asia, which said the project was expected to be worth roughly $13 billion.

The display project is among several deals under discussion between the United States and Japan, said one of the sources, who declined to be identified.

Reuters has reported that the two sides are working to include a nuclear power project involving Westinghouse in a second round of deals which are part of investment commitments Tokyo made in its U.S. tariff agreement.

Japan Display, formed in 2012 in a government-backed merger of the display units of Sony Group 6758.T, Toshiba and Hitachi 6501.T, was once one of the world's top vendors of liquid crystal display (LCD) panels and the primary screen supplier for Apple's AAPL.O iPhones.

But Apple's shift to organic light-emitting displays $(OLED)$, combined with price competition from Chinese players, has left Japan Display struggling with losses for more than a decade.

The company is consolidating its domestic plants to focus resources on automotive displays and is ending OLED panel production for the Apple Watch.

The Japanese government invested more than 460 billion yen in Japan Display but exited last year, losing about a third of its investment.

Research firm Counterpoint forecasts China will continue to dominate global display capacity, expanding its share from 68% in 2023 to 75% in 2028.

($1 = 158.6500 yen)

(Reporting by Makiko Yamazaki; Editing by Edwina Gibbs)

((Makiko.Yamazaki@thomsonreuters.com;))