Taiwan's Kuomintang (KMT) opposition party has proposed merging with its electoral ally, the People First Party.
Security is tight ahead of Mr Chen's inauguration
The announcement came a day before President Chen Shui-bian was due to be inaugurated for a second term.
Mr Chen's acceptance speech will be closely watched for comments on China, which has issued threats in recent days against Taiwanese independence.
China views Taiwan as a breakaway province that should be re-united with the mainland, by force if necessary.
The merger proposal was announced on Wednesday by the KMT, following a meeting of its senior leaders.
KMT Chairman Lien Chan said the idea had been unanimously approved by his party's central committee.
He said both he and the PFP leader, James Soong, would form a task force to work out the details.
Analysts said the merger would not drastically change Taiwan's political scene.
Mr Chen won by 0.2% of votes cast
Recount completed but unlikely to affect result
Separate legal challenge could drag on for months
The two parties already ran a joint presidential ticket in the March elections and have been trying to overturn Mr Chen's slim 0.2% victory over Mr Lien.
A nine-day recount of disputed votes ended on Tuesday, but a final High Court ruling on the presidential poll is expected to take several days if not weeks.
Security around the presidential palace has been stepped up in preparation for the inauguration ceremony.
The KMT has said it will boycott the event, and stage a large protest rally.
China, which is worried Mr Chen is pushing the island towards formal independence, will also be watching the inauguration speech closely.
Beijing wants "Mr Chen to soften (his) radical separatist stance in his inauguration speech," the official China Daily newspaper said on Wednesday.
On Monday China issued a strongly worded statement demanding Taiwan end its "lurch towards independence".
The report, carried by China's official Xinhua news agency, said that if Taiwan's leaders chose a separatist agenda, they would "meet their own destruction by playing with fire".
Merger plans between the KMT and PFP are expected to be formally proposed at a KMT party congress this summer.
A single opposition party could be formed to contest end-of-year parliamentary elections, the BBC's Caroline Gluck in Taipei reports.
KMT chairman Lien Chan said his party had agreed to a merger
One senior party leader said a splintered opposition had lost the KMT the past two elections, our correspondent adds.
PFP leader James Soong quit the KMT four years ago to stand as an independent presidential candidate, but the three-way race was won by Chen Shui-bian, ending more than 50 years of KMT rule.
Many rank-and-file PFP members have expressed unhappiness over the merger plan, saying there had been no consultation.
Some PFP members said that while the two parties should strengthen their co-operation, it was too early to talk about a merger before the parliamentary elections.