A deal, which one person said could be announced within days, would be the latest blockbuster agreement in the pharma sector.
Until recently, Teva had been entirely focused on its attempt to acquire rival generic drugmaker Mylan. Earlier this month, Teva was preparing to increase its offer to buy Mylan to $43bn in what would have been the latest move in a fiercely contested hostile takeover campaign, people familiar with the matter previously told the FT.
If a deal is clinched with botox-maker Allergan, it is unlikely to pursue Mylan any further, said one person familiar with the company's thinking.
Teva has built a 4.6 per cent of Mylan over the past months. But this week an independent foundation, which under the terms of Mylan's recently acquired Dutch domicile, activated a sort of poison pill that gave it 50 per cent of the voting rights in the company. The foundation, known as a stichting, said it had determined a Teva-Mylan deal was not in the best interests of shareholders.
Siggi Olaffson, who leads Teva's global generics business, is a former senior executive of drugmaker Actavis and had helped build the company's generic drug unit before he left the company in 2014. Later that year, Actavis agreed a $66bn takeover of botox-maker Allergan and took that company's name this year when the deal closed
In the Teva-Alleragn deal, a so-called "Reverse Morris Trust" structure, where Teva merges with Allergan's generics unit using a stock swap, could be a tax-efficient way to structure the deal. However such a method has strict requirements about the relative sizes of the companies, typically with the spun company needing to be larger than the merger partner.
More from the Financial Times:
Teva's probable decision to withdraw from the race to acquire Mylan is likely to help its rival secure shareholder approval for another deal.
Mylan shareholders will vote next month to either approve or block the group's proposed $35.6bn, unsolicited offer for Perrigo, another generics drug company.
The Wall Street Journal first reported news that Teva was in advanced talks with Allergan. Bloomberg first reported that Allergan was exploring a sale of the generics unit.