DUBAI - Oman is in talks with banks about a possible U.S. dollar-denominated sukuk issue that could occur in March, sources familiar with the matter said on Thursday.

The planned fund-raising exercise would be Oman's second public debt issuance this year, as the sultanate borrows internationally to finance a budget deficit caused by low oil prices.

Oman sold a $6.5 billion conventional bond in January, its largest ever debt sale. The new issue is expected to be much smaller in size, as the deficit will be funded mostly through conventional debt, said one banking source familiar with the matter.

The Omani ministry of finance did not immediately respond to a request for comment.

Oman is rated BB by Standard & Poor's and was downgraded to BBB-minus by Fitch late last year.

The planned sukuk issue would be Oman's second public Islamic bond issue in international markets. It issued its first last year, raising $2 billion with a seven-year maturity.

Combined with the January issue, the new sukuk cold cover all of Oman's budget deficit for this year, officially projected at 3 billion rials ($7.8 billion).

(Editing by Andrew Torchia) ((Davide.Barbuscia@thomsonreuters.com; +971522604297; Reuters Messaging: davide.barbuscia.reuters.com@reuters.net))