UFJ, Japan's fourth biggest bank, has confirmed it is seeking a takeover by Mitsubishi Tokyo Finance Group (MTFG), to create the world's biggest bank.
Japanese consumers are key to a continuing recovery
The combined assets would be worth 188 trillion yen ($1.74 trillion; £0.94 trillion) - bigger than Citigroup.
A merger would be part of the ongoing process of restructuring the nation's ailing financial system.
It would act as a rescue plan for UFJ, say analysts, after three years of heavy losses.
By contrast, MTFG, Japan's second largest bank, is one of Japan's healthiest.
In a statement, MTFG said it has not yet received any approach regarding business integration from UFJ.
If the deal goes ahead it would help MTFG gain ground on Mizuho Financial Group, currently Japan's largest bank, by boosting its retail business, said analysts.
UFJ is a relative laggard in clearing up its bad loans position.
UFJ: Net income - 402bn yen loss
UFJ: Assets - 82 trillion yen
UFJ: Branches - 520 domestic, 26 overseas
MTFG: Net income - 560bn yen profit
MTFG: Assets - 106 trillion yen.
MTFG: Branches - 315 domestic, 81 overseas
source: UFJ, MTFG March 2004
UFJ reported large losses for the last financial year and was criticised by the Financial Services Agency in June for being evasive when inspections by regulators were taking place.
In May this year, UFJ reported a loss of 402.8bn yen, making three straight years of losses.
Its bad debts rose to 3.95 trillion yen, up 6.5% in six months, and its president announced he will resign.
The merger talks have yet to begin but it has emerged from a UFJ official, who wishes to remain anonymous, that the planned sale of UFJ's trust-banking operations to Sumitomo Trust will be scrapped.
Shortly after the plan was announced, Sumitomo threatened to take legal action against UFJ's proposal.
Japanese banks have been under increased pressure to sell-off non-core assets in order to raise their cash pile and bette fend off the threat of bad debts.
The tide may have turned following a recent set of solid bank results which seem to be evidence that years of groaning under the weight of trillions of yen in bad debts accumulated during the free-spending 1980s may be coming to an end.
The debts were secured against shares and property, both of which crashed in value during the 1990s.
The bank debts have been one of the main obstacles to Japan's recovery - the world's second largest economy.