Ladbrokes is in talks with the board of Gala Coral Group over a possible merger.
A deal would create the UK's biggest bookmaker with nearly 4,000 high street shops.
Shares in Ladbrokes rose more than 11 percent after the announcement.
Ladbrokes chief executive Jim Mullen said: "A merger with Gala Coral could create a combined business with significant scale and has the potential to generate substantial cost synergies, creating value for both companies' shareholders.”
If the deal goes ahead, it would see the merged group overtake William Hill as the biggest UK bookmaker, bringing together around 2,100 shops from Ladbrokes and 1,845 from Coral.
The merger talks do not include Gala's 132-strong bingo business.
Ladbrokes previously attempted to buy Coral in 1998, but its planned takeover was blocked by the government.
The then Trade and Industry Secretary Peter Mandelson said a merger would lead to "a weakening of price competition at the national level" and a reduction in consumer choice.
