The takeover would value Netscape at around $4bn, and may be concluded imminently.

However no deal has been reached as yet and discussions about the terms of any takeover are still taking place.

AOL is a leading Internet firm offering access to the worldwide network of information.

By acquiring Netscape it would gain access to the group's software, its website and one of the world's leading web browsers, which allows users to find their way around the Internet.

The complex deal includes another software giant Sun Microsystems.

As part of the agreement Sun Microsystems would be able to distribute its Java technology for running Internet programmes to AOL's 14m subscribers.

AOL confirmed that it was in discussions with Sun Microsystems on a development and marketing agreement for Internet commerce and other services.

Blow to Microsoft

Any deal would be a blow to Netscape's arch rival Microsoft.

Together AOL, Netscape and Sun Microsystems would provide a significant threat to Bill Gates' computer software giant.

AOL currently distributes Microsoft software to its subscribers and a switch to Netscape would have significant repercussions for the development of the US Internet industry.

"This is bad news for Microsoft," said William Field, partner at the US consultancy Spectrum Strategy Consultants.

Microsoft is currently embroiled in a prolonged court battle with the US Government over allegations that it attempted to dominate the Internet browser market, driving out market leader Netscape and subsequently acted unfairly in securing a large part of this market.

Allegations that Microsoft's attempted to limit the use of Java, Sun's universal programming language for the Internet, have also been made.

Both AOL and Netscape are co-operating with the government at the Microsoft anti-trust trial.

AOL considered a deal with Netscape three years ago in a bid to counter the competitive threat from Microsoft.

Talking for weeks

AOL, Netscape and Sun Microsystems are understood to have been holding talks for the past few weeks.

Shares in AOL and Netscape soared last week after reports that AOL could use Netscape's browser instead of Microsoft, although it now appears a full takeover is on the agenda.

AOL has the right to terminate its deal with Microsoft at the end of December.

Any deal with AOL would provide an important boost to Netscape's business.

The high share price for Internet stocks has encouraged acquisitions by making it attractive to pay rival shareholders with shares rather than cash.

The takeover would involve a share swap, whereby Netscape shareholders receive shares in AOL.

Netscape shareholders stand to receive 0.45 AOL shares for each Netscape share held, valuing Netscape at just over $38 a share.

That is below the price at which Netscape's shares closed on Friday.

News of a possible takeover is likely to lead to a sharp rise in US stocks when trading opens on Wall Street.