Deutsche Telekom's subsidiary T-Mobile UK and France Telecom's Orange are set to announce they are in exclusive talks to form a joint venture, sources familiar with the situation said.
Both firms declined to comment, but three sources familiar with the situation told Reuters that the two firms were hoping to announce as early as Tuesday that they were in exclusive talks on forming a venture. The sources cautioned that the deal could still fall apart, however.
Deutsche Telekom is currently considering its options for the UK unit which has struggled in the highly competitive market where five operators and several smaller players compete.
In the past Chief Executive Rene Obermann has said the Bonn-based company was open to all options after the UK arm took an impairment writedown of 1.8 billion euros in the first quarter of the year.
Media reports on Sunday said Vodafone and Telefonica had tabled preliminary bids at 3.5 billion pounds ($5.74 billion) and analysts have suggested that this was not enough.
Any consolidation within the UK market will also likely draw the attention of regulators. Telefonica's O2 currently has about 27 percent of the market in Britain, followed by Vodafone with 25 percent, Orange with 22 percent, T-Mobile with 15 and Hutchison Whampoa's 3 UK with 8 percent.
Analysts have been divided over the merits of a joint venture or a straight sale, with some arguing that a joint venture could be complicated unless one group takes control.
All four mobile groups have declined to comment on the situation.
(Reporting by Kate Holton, Nicola Leske and Nikola Rotscheroth, Editing by Sitaraman Shankar)