Drugs giants SmithKline Beecham and Glaxo Wellcome have restarted merger talks two years after initial negotiations broke down.

In a brief statement, the two British firms said they were "in discussions which may or may not lead to a merger of equals".

The news boosted shares in the two firms. Initial euphoria saw SmithKline Beecham shares jump 85p to 876p while Glaxo Wellcome shares soared £1.44 to £18.84.

However, by 1200 GMT, the gains had been pared to 46p and 74p respectively.

The combined group would be one of the largest in the UK with a market value of about £110bn ($181bn).

Glaxo's market capitalisation was £63.3bn at close of trade on Thursday, while SmithKline was valued at £44.4bn.

The two companies said there would be no further comment or announcement "unless and until discussions are concluded."

Rumours confirmed

The announcement was made in response to continued City rumours and newspaper reports, the latest of which appeared in Friday's Financial Times.

The newspaper said the talks were progressing smoothly and were "on track to be successfully concluded".

It said the merger would result in cost savings of £1-1.5bn - about 8% of the combined sales of some £20bn.

Original talks between the two companies aimed at creating the world's biggest drugs group collapsed because of a clash between Glaxo executive chairman Richard Sykes and SmithKline chief executive Jan Leschly over who should run the group.

Last year Jan Leschly said he planned to retire in April this year - a move which was widely seen as clearing the way for fresh merger talks with Glaxo Wellcome.

Job loss fears

Already, fears have arisen that a merger could lead to job losses.

Unions have predicted that 15,000 jobs could be lost.

The Manufacturing Science and Finance union said that if a deal goes ahead, there would be redundancies as the two firms cut out overlaps.

Firms under pressure

Drugs firms worldwide are under pressure in the face of rising costs as the search for new medicines becomes more complex.

The talks between Glaxo and SmithKline come amid unprecedented consolidation in the drug industry and follows recently announced merger plans between Pharmacia & Upjohn and Monsanto and Pfizer's attempt to take over Warner-Lambert.

The link-up of Glaxo and SmithKline would create the world's biggest producer of prescription drugs with a market share of more than 7%.

Merck is currently the world's largest prescription drugmaker, with a market share of 4.2%, with AstraZeneca and Glaxo Wellcome close behind.

These will soon to be overtaken by the merger of Pfizer and Warner-Lambert, who together will have a market share of 6.3%.