Borsa Italiana has backed a 1.6 billion euro ($2.14 billion) takeover by the London Stock Exchange, said a person close to the situation, bringing closer a deal that could boost the LSE's own bid defenses.
"The board has given the chief executive (Massimo Capuano) the mandate to accept the proposal and do everything necessary to carry it through," said the source, who requested anonymity.
The source said the deal offers 4.9 LSE shares for every Borsa share.
Other sources gave further details. The Italian side would provide five board members on the newly combined company and London seven.
"Borsa's value is under 30% of the total of the two companies but the LSE is giving Borsa, which ends up under its control, a premium at the board level," one of the sources said.
The LSE could not immediately be reached to comment.
After two years as prey in the rapidly consolidating global exchanges sector, an agreed deal could transform the LSE into a predator alongside U.S. rivals the New York Stock Exchange and Nasdaq Stock Market .
The LSE would also beef up its access to fixed income trading. Earlier this week Borsa Italiana exercised an option to buy NYSE Euronext's stake in MBE, which controls European bond trading platform MTS.
A tie-up with Europe's fourth-largest stock market operator by the total value of shares traded is nevertheless mainly seen by some analysts as a defensive move by the LSE against Nasdaq, which has retained a 30% stake in its London rival after a failed takeover bid.
"LSE management is likely to present the merits of the deal as increased exposure to continental cash equities and diversification to Borsa Italiana's derivatives and fixed income operations. The market is likely to be more cynical and view it as an effort to bulk up and make it harder for Nasdaq to acquire it," said Citigroup analysts.
Italian Industry Minister Pierluigi Bersani said he favored the deal but wanted to see the full details.
NYSE Euronext , the world's biggest stock market operator, recently approached Borsa Italiana with its own takeover offer, sources familiar with the matter had said earlier in the week.
One of the sources said after Friday's board meeting in Milan that there had been another offer but it was not concrete enough to present to the board.
Nasdaq, which is in the process of buying Nordic and Baltic market operator OMX, has indicated it would not make another European buyout until it felt comfortable with progress on this deal.
Deutsche Boerse, which runs the Frankfurt stock market, was not likely to make a counterbid, a source familiar with the matter said, as it digests a U.S. acquisition and sees limited benefits from such a merger.
In slides prepared for Deutsche Boerse's investor day and posted on the company's Web site on Friday, the exchange said it was focusing on organic growth and did not mention the takeover situation at Borsa Italiana.
NYSE Euronext was formed by the merger of the largest U.S. stock exchange with Paris-based Euronext.
LSE shares closed up 0.15% at 1360.36 pence.
NYSE Euronext shares in Paris were down 2.81% at 57.15 euros.