Italy's largest bank UniCredito is in talks to take over Germany's second largest lender, HypoVereinsbank (HVB).
HVB has seen weak profits in recent years
A successful merger between the two companies would create Europe's ninth largest bank.
However, UniCredito and HVB said in a joint statement that a deal was "still subject to considerable uncertainty".
Takeover rumours were also surrounding HVB's German rival Commerzbank, with the UK's Royal Bank of Scotland and two French banks reported to be interested.
BNP Paribas and Societe Generale were said to be weighing up possible bids for Commerzbank.
HVB's largest shareholder, insurance giant Munich Re, hinted that it may back UniCredito's plans.
"We will not stand in the way of sensible consolidation ideas," said a spokesman for Munich Re, which owns 18% of HVB.
Neither UniCredito nor HVB have revealed a potential figure for the takeover, but analysts say the German bank could be worth 16bn euros ($20.1bn; £11bn).
Konrad Becker, a banking analyst with Munich private bank Merck Finck, said HVB might have its eyes on a particular part of HVB.
"The central question is whether it is worth it for UniCredito, if their goal is to purchase (HVB's unit) Bank Austria and then split out and sell the rest," he said.
UniCredito already has a strong presence in central Europe, and taking control of HVB's profitable Bank Austria Creditanstalt would help boost this.
Shares in both HVB and Commerzbank rose on Monday on the takeover talk.
HVB was up by 1.49% by early afternoon, while Commerzbank was ahead by 3.27%, the biggest riser on Frankfurt's DAX index.