Without giving a specific source, the UK paper said top executives from the two companies were understood to have met for preliminary talks since the beginning of February but had yet to agree the terms.

An outline structure, which was still under discussion, was thought to value SmithKline at around 11.50 pounds a share and would include the payment of a substantial special dividend by Novartis to SmithKline shareholders, it said.This would be an attempt by Novartis to prevent a counter offer from rival UK group Glaxo Wellcome Plc. Company officials were not immediately available for comment.

The Sunday Business said an option under consideration was a dual listing of shares in a combined Novartis-SmithKline. Novartis chairman and chiefexecutive Danie Vasalla would be likely to get a top job in any deal, the paper said.

However, JP Garnier, SmithKline's chief operating officer who is expected to replace chief executive Jan Leschly, who retires in September, would be the frontrunner to head the pharmaceuticals.

SmithKline shares fell sharply last week on profit-taking asrecently renewed merger speculation evaporated. The shares closed up 16 pence or nearly two per cent higher on Friday at 835-1/2P. SmithKline has been a perennial takeover target since a planned merger with larger rival Glaxo Wellcome broke down in acrimony last year. Last weekend, newspaper reports had suggested that Glaxo might be reconsidering a tie-up with SmithKline.