GVC Holdings has proposed an up to £3.9bn takeover offer for Ladbrokes Coral.
Shares in Ladbrokes Coral jumped on the news, rising more than 24 per cent to 168.7p, while GVC's stock rose 4.4 per cent to 949p at the market open.
In a joint statement today, the two bookmakers said they were in "detailed discussions" on a deal that would create an online global betting giant.
GVC, which owns Bwin and Sportingbet among other brands, said the final price it offers could be as low as £3.1bn depending on the outcome of a government review of fixed-odds betting terminals (FOBTs).
While FOBTs have been a huge source of profit for bookmakers like Ladbrokes, a cross-party group of MPs has criticised them for being too addictive, labelling them the "crack cocaine of gambling".
Under the cash and stock proposal, Ladbrokes Coral shareholders would be given around 46.5 per cent of the combined group while GVC shareholders would hold the rest.
The firms also said GVC's chief executive Kenneth Alexander would be the boss of the enlarged group.
Takeover talks between the two firms broke down over the summer due to disputes over the value of Ladbrokes Coral and unease over the government's gambling sector review.
The two companies had previously entered talks at the end of last year as Ladbrokes was completing its merger with Coral.
The gambling firms said the combined group would be an "online-led, globally positioned betting and gaming business that would benefit from a multi-brand, multi-channel strategy applied across some of the strongest brands in the sector".
They said the transaction would be double-digit accretive from the first full year after completion, following "all reasonably expected outcomes" of the review on FOBTs.
Greg Johnson, an analyst at Shore Capital, said: "We see significant merits in the tie up notably from cost synergies, a more diverse geographic footprint and reduces the risk around UK regulation and machines in particular.
"Against this it does bring in some geographic risk in GVC notably around Germany following the exit from Turkey, whilst the cash elements, we estimate worth £600m and £800m (max for the triennial review element), are more the comfortable from the existing balance sheet and future cash generation."