LONDON (Reuters) - Bookmakers Ladbrokes (>> Ladbrokes PLC) and Gala Coral agreed to merge on Friday, creating a 2.3 billion pound business which will be Britain's largest high street betting group and better equipped to compete in the growing online market.

The latest deal in the gambling sector comes only a week after online betting company 888 (>> 888 Holdings Public Limited Company) agreed a 900 million pound takeover of rival Bwin.party (>> Bwin.party Digital Entertainment Plc). Betting companies are responding to higher tax bills in Britain and tighter regulation of the industry.

Ladbrokes, which has struggled to keep pace with larger rival William Hill's (>> William Hill plc) online expansion, said it would issue new ordinary shares to existing Gala Coral shareholders representing 48.25 percent of the enlarged company. Existing Ladbrokes investors will own 51.75 percent on the same basis.

Gala Coral Group is owned by a group of private equity companies including Apollo, Anchorage and Cerberus.

To help fund the deal, which came after talks were announced last month, Ladbrokes is placing 93 million new shares, representing 10 percent of the company.

Ladbrokes Chief Executive Jim Mullen will become boss of the merged company, which will be named Ladbrokes Coral and have combined revenues of 2.1 billion pounds. Gala Coral CEO Carl Leaver will be executive deputy chairman.

LADBROKES CUTS DIVIDEND

The new group will have around 4,000 betting shops, almost half the UK market, although regulators are expected to insist some shops are sold off in areas where they overlap.

A merged entity will also have more firepower to compete online, an area where demand is increasing rapidly on the back of mobile and tablet apps, but where Ladbrokes has fared poorly.

The two firms said they expected cost synergies of at least 65 million pounds a year.

As part of the merger agreement Ladbrokes said it would buy out partner Playtech (>> Playtech PLC) from a digital marketing services deal with cash and shares in the new group.

Playtech has also agreed to take up 22.9 percent of Ladbrokes' equity placing. It will have less than a 5 percent stake in the new company.

In a flurry of announcements Ladbrokes also said full-year operating profit will be about 20 million pounds lower than expected and that it had decided to cut its full-year dividend of 8.9 pence per share to 3p, to fund digital marketing investments.

Shares in Ladbrokes slipped 2 percent by 0740 GMT.

(Reporting by Neil Maidment; Editing by Jane Merriman and Keith Weir)