By Martin Coulter

(Reuters) -Apple is in talks to build Google's Gemini artificial intelligence engine into the iPhone, Bloomberg News reported on Monday, citing people familiar with the situation.

The negotiations are about licensing Gemini for some new features coming to the iPhone software this year, the report said, adding that the terms or branding of an AI agreement or how it would be implemented have not been decided.

Alphabet shares jumped more than 6% in early U.S. trading, while Apple was up 2.5%.

It is unlikely that any deal would be announced until June, when Apple plans to hold its annual conference of developers, and the iPhone maker also recently held talks with ChatGPT-maker OpenAI about using its model, according to the report.

Apple, Alphabet-owned Google and OpenAI did not immediately respond to Reuters requests for comment.

A potential deal between the firms could help Google expand the use of its AI services to more than 2 billion active Apple devices, boosting the search giant's efforts to catch up with Microsoft-backed OpenAI.

It could also help allay investor fears about the slow roll-out of AI apps by Apple, which has lost the crown of the world's most valuable firm after a 10% decline in its shares this year.

The firms have a years-long partnership that makes Google the default search engine on Apple's Safari web browser, and a genAI tie-up may help the Alphabet unit navigate fears that services like ChatGPT could threaten its search dominance.

But the agreement could also invite sharper scrutiny from U.S. regulators, who have sued Google on grounds that it unlawfully stifled competition by paying billions of dollars to Apple to maintain its monopoly in search.

"This strategic partnership is a missing piece in the Apple AI strategy and combines forces with Google for Gemini to power some of the AI features Apple is bringing to market," said Daniel Ives, an analyst at Wedbush.

"This is a major win for Google to get onto the Apple ecosystem and have access to the golden installed base of Cupertino with clearly a major licence fee attached to this," he said, referring to Apple's California headquarters.

Google in January partnered with Apple's rival Samsung to deploy its genAI technology in the South Korean firm's Galaxy S24 series of smartphones, as part of its efforts to boost the use of Gemini after some missteps during its roll-out.

Apple CEO Tim Cook said last month that the company was investing "significantly" in generative AI and would reveal more about its plans to put the technology to use later this year.

The Bloomberg report said Apple was planning to use its own homegrown AI models for some new capabilities in its upcoming iOS 18, but was seeking a partner to power genAI features, including functions for creating images and writing essays based on simple prompts.

(Reporting by Jahnavi Nidumolu and Aditya Soni in Bengaluru; Editing by Savio D'Souza, Janane Venkatraman, Varun H K and Susan Fenton)