* Deal for $3.5 bln, or $70.53 per share, in stock
* See at least $100 mln cost savings per year by 2016
* Trulia shares rise as much as 18 pct to $66.56 (Adds details and Breakingviews link; updates shares)
By Abhirup Roy and Supantha Mukherjee
July 28 (Reuters) - Zillow Inc said it would buy smaller rival Trulia Inc for $3.5 billion in stock, combining the two most-popular U.S. real estate website operators at a time when more prospective homebuyers are screening properties online.
The deal will enable the companies, rivals for nine years, to cut heavy marketing costs that have seen both run up heavy losses.
The companies said they expected the deal to help save at least $100 million every year by 2016. Between them, the companies spent $382 million in 2013, more than their revenue. Their combined annual loss was $30 million.
Trulia's shares rose 18 percent to a high of $66.56, still well short of the offer, which values the company at $70.53 per share. Zillow's shares were up about 1 percent at $159.86.
Short-seller Citron Research, which has campaigned against Zillow for about two years, said the combined company would still be not big enough to stand up against the real estate industry.
Zillow and Trulia list properties for sale or rent on behalf of homeowners and real estate agents and generate revenue through subscriptions and advertisements.
While a recovery in the U.S. housing market has been tempered by higher mortgage rates and prices, online real estate firms are cashing in as homebuyers scour the Internet for better deals.
The U.S. online real estate advertising market is expected to grow 41 percent to $16.3 billion in 2015 from 2013, said Corey Elliott, director of research at market research firm Borrell Associates.
Zillow, known for its estimated home values called "Zestimates", reported 83 million unique users in June, ranking above websites such as Buzzfeed and Pandora. Trulia had 54 million unique users in the same month.
Trulia's shareholders will receive 0.444 common shares of Zillow for each share they hold and will own about 33 percent of the combined company, the companies said.
"I think it (deal value) was a little above what people were expecting but the opportunities are big enough that you can justify it," said Telsey Advisory Group analyst James Cakmak, who covers both Zillow and Trulia.
Tiger Global Management, Morgan Stanley and BlackRock Institutional Trust feature among the top 10 shareholders in both the companies.
Citron, noting that Zillow's marketing spending was more than its revenue, termed the possible combination with Trulia as "Zuliagate". (http://bit.ly/1rKDZVE)
Zillow has rejected Citron's claims that the company's business model was flawed.
Trulia's annual losses have been widening even as revenue has nearly doubled every year since 2010. Zillow's revenue has been growing at a slightly slower rate.
But shares of both companies have been on a tear, leading to sky-high valuations as real estate advertising has moved to the Internet from newspapers.
Zillow shares should be valued at $15.53, based on analysts' expected earnings growth rates over the next decade, according to StarMine. That is about a tenth of what the market values the stock at.
Up to Friday's close, Zillow's shares nearly doubled so far this year and Trulia's shares gained about 60 percent.
RBC Capital Markets analyst Mark Mahaney said he saw limited overlap in the readership of the two sites.
"Roughly half of Trulia's monthly visitors do not visit Zillow and roughly two-thirds of Zillow's monthly visitors do not visit Trulia," he said. "We believe real estate agent overlap is higher, however."
Trulia's shares jumped as much as 40.5 percent to $57 on Thursday after Bloomberg first reported that Zillow may buy the company.
Goldman Sachs is the financial adviser and Shearman & Sterling LLP and Perkins Coie LLP is legal counsel to Zillow.
JP Morgan Securities and Qatalyst Partners are Trulia's advisers and Goodwin Procter LLP and Wilson Sonsini Goodrich & Rosati are its legal counsel.
(Editing by Joyjeet Das and Saumyadeb Chakrabarty)