By Ronald Grover

(Reuters) - DreamWorks Animation SKG Inc, the studio behind the "Shrek" franchise and this summer's "Madagascar 3: Europe's Most Wanted," is in talks with Sony Pictures Entertainment about distributing its films, according to a person with knowledge of the discussions.

Under a contract that expires next year, DreamWorks pays Viacom Inc's Paramount Pictures 8 percent of film revenues generated at movie theaters and on DVD. Last year, Paramount rejected a request from DreamWorks Animation CEO Jeffrey Katzenberg to extend the agreement and lower the fee to 7 percent.

DreamWorks has told analysts that it intends to sign a new agreement by mid-year to give it time to create marketing campaigns needed for next year's films.

Few details have been agreed with Sony, and an announcement is not expected soon, according to the source. Katzenberg had sought to create his own distribution operation, and may still agree only to have Sony distribute the films internationally.

Paramount is said to average $50 million in revenues for each DreamWorks film, after covering its costs, according to one person with knowledge of the agreement.

Paramount's last DreamWorks release is "Rise of the Guardians," a story in which Santa Claus, the Easter Bunny and Jack Frost save the world's children. It is scheduled for release on November 12.

DreamWorks Animation, which had a prior distribution arrangement with Universal Pictures that expired in 2008, had decided against distributing its own films worldwide, according to the Los Angeles Times, which first reported the news.

Katzenberg has talked in the past to Fox, a unit of News Corp, and Warner Brothers, which is part of Time Warner Inc.

DreamWorks and Sony had no comment. Paramount could not be reached for comment.

Dreamworks Studios, Steven Spielberg's live action film company, is a separate company whose films are released by Walt Disney Co.

(Reporting by Ronald Grover; Editing by Jackie Frank)