Ladbrokes Coral says it is holding "detailed discussions" regarding a takeover offer from rival GVC that values the bookmaker at £3.9bn ($5.2bn).
A joint statement released by the two companies said the potential deal will give GVC shareholders ownership of 53.5% of the combined firm, with Ladbrokes shareholders holding the rest.
Both firms have also agreed that Kenneth Alexander of GVC will be the chief executive of the combined company if the deal goes through.
Shares in Ladbrokes jumped nearly 30% on the news during early trading in London.
GVC's approach comes weeks after Department for Culture, Media and Sport announced plans to drastically slash the maximum stake on fixed-odds betting terminals (FOBTs), which are the largest source of revenue for retail bookmakers.
The online betting group had failed with an earlier bid for Ladbrokes, believed to be worth £3.6bn.
"The boards believe that a transaction has the potential to create material shareholder value and that there is a compelling strategic rationale for the possible offer," the statement said.
"The enlarged group would be an online-led globally positioned betting and gaming business that would benefit from a multi-brand, multichannel strategy applied across some of the strongest brands in the sector."
Ladbrokes's revenues increased 2% on a constant currency basis for the period between 1 July and 29 October, driven mainly by a strong performance at its online gambling division.
However, analysts have warned that the government crackdown on FOBTs would have an adverse impact on Ladbrokes's bottom line.
"We have existed with the uncertainty caused by the review [on FOBTs] since we were created and hope that the announcement of a 12-week consultation heralds a positive step to reaching a final outcome. We will take a full part in the consultation," chief executive Jim Mullen said last month.
GVC, the Isle of Man, owns online betting portals such as Bwin and Sportingbet. A takeover of Ladbrokes by GVC would create one of the largest gambling companies in the world.