If the deal goes through, it would catapult Reliance, controlled by India's richest man Mukesh Ambani, into the ranks of top petrochemical makers such as Saudi Arabia's SABIC 2010.SE, Germany's BASF and Dow Chemical Co.
Sources have put the value of the cash offer at $10-$12 billion, making it India's second-biggest overseas purchase after Tata Steel bought Corus for $13 billion in 2007.
In deals like Tata-Corus, the valuations were phenomenally high. But when a company is down and out, it is going to be cheap, said Rakesh Rawal, head of private wealth management at Anand Rathi Financial, who has bought the stock for his clients.
If I am breathing my last, what bargaining will I do, he added, saying Reliance is betting on turning around a bankrupt company rather than paying a heftier price to buy a more stable firm.
The bid comes when prices of assets have fallen globally in the wake of the financial crisis. Bank of America Merrill Lynch is among the advisers for Reliance, sources told Reuters.
The deal would give Reliance, India's biggest listed firm with a market value of $75 billion, greater access to U.S. and European markets and expand its product offering, analysts said.
Reliance has largely been a domestic story, but this deal would make it a global story, Deepak Pareek, an oil and gas analyst at Angel Broking, said.
Lyondell has operations in 19 countries, and Reliance will leverage that to expand its global footprint, he said.
LyondellBasell had sales of close to $51 billion in the 2008/09 financial year, while Reliance, which has interests in petrochemicals, refining, oil and gas exploration, and retail, pulled in revenue of 1.5 trillion rupees ($32.5 billion).
The world's largest chemicals maker, BASF, had sales of 62.3 billion euros ($92.9 billion) in calendar 2008.
Goldman Sachs analyst Nilesh Banerjee said the bid marked Reliance's intent and ability to inorganically grow its core businesses amid limited competition for asset acquisition.
Last week, Reliance chairman Mukesh Ambani said the firm wanted global scale for its conventional energy platform of petrochemicals, refining and oil and gas exploration.
Reliance shares rose as much as 3.8 percent to 2,205 rupees, their highest since Oct. 21, and ended with gains of 3.3 percent in a broader market .BSESN up 0.9 percent.
Banerjee said Reliance has no major projects lined up to use up about $20 billion of excess cashflow between the 2011 and 2014 financial years after its committed capital expenditure.
Luxembough-based LyondellBasell filed for protection in January, after it was unable to make its debt obligations, hit by waning demand for petrochemicals products in the global economic downturn.
The company is owned by investor Len Blavatnik through New York-based Access Industries. LyondellBasell had taken on billions of dollars of debt obligations when Access Industries led a 2007 buyout.
A successful deal by Ambani, ranked by Forbes as India's richest man with a net worth of $32 billion, would mark a return of Indian companies to large-scale global M&A after a break of more than one-and-a-half years.
The global credit crunch and economic downturn made it difficult for firms such as aluminium maker Hindalco and Tata Motors, which bought Jaguar Land Rover, to digest big deals made in 2007 and early 2008.
The deal comes as Reliance is embroiled in a legal battle over gas supplies to Reliance Natural Resources, which is led by Mukesh's estranged younger brother Anil.
Reliance has been looking to take advantage of low valuations to expand internationally and analysts said the company has enough firepower to finance the deal.
It has $4 billion in cash, $8 billion in treasury stock that can be sold, and if it doubled its current net debt-to-equity it could borrow another $10 billion, Macquarie said in a research note ahead of the bid.
The proposed deal would also give Reliance greater bargaining power in sourcing, and technology patents, analysts said.
LyondellBasell generates about 34 percent of its revenue from fuels, 30 percent from chemicals and 35 percent from plastics.
The petrochemical firm had $27.1 billion of assets and $19.3 billion of debt, according to its bankruptcy filing.
One complicating factor for a possible deal is the litigation between LyondellBasell's creditors, as it will be unable to move forward with its reorganisation until that litigation is resolved, LyondellBasell spokesman David Harpole has said.
In September, LyondellBasell said it was planning a stock offering to raise funds to exit bankruptcy protection. ($1= 0.6704 euro = 46.4 rupees) (Additional reporting by Aaron Gray-Block in AMSTERDAM; Ami Shah and Devidutta Tripathy in MUMBAI; Editing by John Mair and Jean Yoon)