Barclays is in exclusive talks with Dutch rival ABN Amro about an estimated £80bn ($155bn) merger, BBC business editor Robert Peston has learnt.
Barclays may become a takeover target itself, analysts say
Barclays is set to clarify its position later on Monday amid speculation of a tie-up with ABN Amro, which would create one of Europe's largest banks.
A Barclays-ABN merger would create a bank with 47 million customers and 220,000 staff worldwide.
It also may prompt other bids for ABN and Barclays itself, analysts said.
ABN declined to comment on the speculation.
The Dutch firm's shares rose 8% in response to the news but Barclays shares closed down 0.8% as investors awaited more information about the situation.
In recent years, ABN - the Netherlands' biggest bank - has cut jobs to control costs so it can expand into new markets and face down more competition.
Barclays, the UK's third-largest bank, wants access to ABN's foreign businesses, in particular its Asian operations, analysts said.
Barclays and ABN held talks two years ago where they first explored the possibility of a merger.
The current talks are at an early stage, and analysts said that they may not lead to an agreement.
"It has been the great dream of Britain's big banks to merge with a large continental rival, and for Barclays that dream may at last be coming true," said the BBC's business editor Robert Peston.
"Simply to have got to the stage where it is in exclusive merger talks with ABN is quite a feat, given the political, regulatory and culture obstacles to such cross-border deals."
Royal Bank of Scotland and Italy's Capitalia are among banking groups who are also thought to be interested in buying some or all of ABN's businesses.
In recent months two UK hedge funds - TCI and Toscafund - have criticised the Dutch bank for its poor performance and both are understood to be calling for a shake-up at the group.
Many analysts believe ABN could eventually be put up for sale or broken up. In January, ABN sold its mortgage arm to US banking giant Citigroup for an undisclosed sum.