The two companies are negotiating a capital alliance, a Nikko official said, adding further details cannot be released because the discussions are still in progress.

There was no formal official comment by any of the companies.Industry sources said that the two companies might announce later this week that the US brokerage Salomon, part of the Travelers Group Inc, would take up a stake of between 10 and 25 per cent in Nikko, Japan's number three brokerage.

The sources said the stake would involve hundreds of millions of dollars.The investment would make Salomon the largest shareholder in Nikko, and it would surpass the amount of equity held by Nikko's current largest investor, Bank of Tokyo-Mitsubishi, they said.

Nikko and Salomon were aiming to establish a joint securities firm, which couldbe formed at the end of this year, the sources said.

The company would manage financial products such as derivatives as well as securities underwriting and large-lot sales of securities to corporate customers, they said.

The new company would ultimately manage corporate business while leaving Nikko to specialise in the retail business, they said. The investment would bring Nikko into the fold of the new Citigroup formed by the mega-merger of Travelers and Citicorp.

It would also be a first in the Japanese financial industry which is going through its Big Bang structural and regulatory reform. The Big Bang is bringing consolidation to Japan's financial services industry and foreign companies are making greater inroads into the Japanese market.

The possible Nikko-Salomon alliance takes the Big Bang on a new road that brings foreign brokerages into Japanese securities firms' board rooms.In February of this year, Nikko and Salomon set up two joint ventures to develop wrap accounts for mutual funds andoffer consulting services to Japanese institutional investors.

One of the ventures, called Global Wrap Consulting Group, aims to manage about two trillion yen ($14.3 billion) worth of investment money in the next three years.

Client's funds for a wrap account can be placed with one or more money managers and the administrative and management fees are wrapped into one comprehensive fee.

The service, the first of this sort in Japan, features asset management with a mixture of mutual funds to be set in accordance with the demands and risk tolerance of each client.

The Nikko-Salomon joint venture announced in February was one of several recent link-ups between Japanese and foreign financial firms in connection with Japan's Big Bang financial reforms.

Foreign firms are eyeing the Japanese market more closely because the financial deregulation gives them an opportunity to tap into Japan's cash-rich markets.

Japanese financial firms, caught in heightened competition at home, have also been turning toforeign partners to tap into their know-how.

If the Nikko-Saloman alliance goes through, Nikko can use the expertise of Salomon to develop financial products that will improve its competitive edge.The Travelers Group and Salomon will be able to tap into Nikko's enormous customer base to expand their operation in Japan.

In April of this year, Nikko announced it had posted a current loss of 38.2 billion yen ($274 million) for the business year that ended March 31, 1998.