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Insiders and City sources have suggested that the companies are working towards a deal that could be finalised by the end of the year.

Other sources have suggested that draft announcements of the deal have been drawn up, but have been hindered by last-minute hitches.

Both companies declined to comment on the matter today.

A spokeswoman for Capital would only say: "Everybody is talking to everybody", and refused to be drawn on what stage any negotiations were at.

Shares in Capital Radio jumped 5% to 420p yesterday and remained steady in early trading this morning. The trading volume is three times the average in Capital shares. GWR gained 4.25p to 255p and climbed further today hitting 257.5p.

A merger would bring together Capital's 95.8 capital FM, Century and Xfm stations with GWR's Classic FM, London News Radio and a local network of stations including Mercury FM, Coast FM and Buzz 97.1

However, some industry sources are sceptical and do not believe negotiations are at such an advanced stage.

There is also talk that Daily Mail & General Trust, which owns a 29% stake in GWR, could throw a spanner in the works by opposing merger plans.

Peter Williams, finance director of DMGT, told The Independent: "We remain open minded. We will listen to any good suggestions."

The two parties have previously denied that they are in negotiations, but since July, groups have refused to make any denials, heating up the merger talk.

The merger could create a combined business worth between £700m-£800m with 40% of the radio advertising market. Analysts claim that the companies could make savings of tens of millions from a merger. Talks of radio mergers have been on the cards since the Communications Act came into force in July 2003.

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