* Talks to sell performance materials ops – source

* Unit could be valued at more than $3.5 bln – source

* Evonik interested in the unit – source (Adds analyst comment, Evonik shares, background)

March 17 (Reuters) – Industrial gas producer Air Products and Chemicals Inc is in advanced talks to sell its performance materials operations to Germany's Evonik Industries AG, a source familiar with the matter told Reuters.

The business, which makes chemicals used in sun lotion and paint, could be valued at more than $3.5 billion, according to the source.

Air Products and Chemicals Inc, based in Pennsylvania, said last year that it planned to spin off its materials technologies business into a publicly traded company, and Evonik has been on the lookout for larger transactions.

"Evonik is looking for less cyclical, asset light chemistry targets and Versum Performance Materials would fit this picture," UBS analyst Patrick Rafaisz said in a note.

He said he believed that Evonik could finance a deal with Air Products without tapping equity markets, considering its net cash position of 947 million euros ($1.07 billion) and annual earnings before interest, tax, depreciation and amortisation (EBITDA) of more than 2 billion euros ($2.3 billion).

A separate source told Reuters on Thursday that Evonik was interested in Air Products' business but that no decision had been made yet whether to pursue a deal.

The Wall Street Journal had reported on Wednesday that the two companies could reach a deal in the coming weeks.

Air Products said its material technologies business had sales of $2.087 billion in 2015, out of group total of $9.895 billion.

Evonik declined to comment on the matter, while Air Products and Chemicals was not immediately available outside regular U.S. business hours.

Shares in Evonik rose 1.5 percent to 27.06 euros by 0934 GMT, outperforming a 0.4 percent decline by the German mid-cap index.

($1 = 0.8861 euros) (Reporting by Parikshit Mishra in Bengaluru and Matthias Inverardi in Duesseldorf; Writing by Maria Sheahan; Editing by Bernard Orr and Keith Weir)

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