The source, who declined to be identified, said the deal could be worth up to $85 billion .

The deal would make Texas-based Exxon the world's biggest publicly traded oil company in terms of reserves and reshape the global oil industry.Top executives of Exxon and Mobil, headquartered in Virginia, were seen on Monday night at Manhattan's St. Regis hotel but they declined comment.The transaction would be the biggest US corporate combination in history, topping the $72.6 billion paid earlier this year by Travelers Group for Citicorp.

Under the deal, Exxon is expected to exchange 1.3 to 1.4 shares of its for each of Mobil's 808.4 million outstanding shares. The terms would value Mobil shares, which closed on Monday at $86.19, between $97 and $105 each, saidthe source.

The deal, which comes just days after word first leaked out that the two companies were in talks, calls for Exxon shareholders to own about 70 per cent of the new company, said the source.

It was not immediately clear if the boards of the two companies had voted on the transaction yet but directors of both companies were expected to approve it.

Exxon chairman and chief executive Lee Raymond will retain management control over the merged company, the source said. Mobil chairman and chief executive Lucio Noto is expected to have a role at the combined company, but his exact title could not immediately be determined.

Takeover experts have speculated it could take at least nine months to close the transaction.

A merged Exxon-Mobil would have 20.743 billion barrels of oil and gas reserves, 1.631 million barrels per day of oil and gas production and 6.66 million barrels of refining capacity.

The terms represent a significant premium to the current price of Mobil shares, which already haverisen sharply in recent days on talk of a deal. Exxon shares closed on Monday at $75.06 each on the New York Stock Exchange.The deal is the latest combination to hit the oil industry, which has struggled in the face of weak oil prices and high costs, and would in essence leave just three major international players in the industry. Oil prices are now hovering near the lowest levels in 25 years.

Until now, the largest oil combination had been British Petroleum's pending $53 billion acquisition of Amoco Corp. The industry also has been rife with smaller acquisitions, joint ventures and alliances.

Wall Street analysts have given mixed reviews to a combined Exxon-Mobil, with some questioning the benefits for Exxon.

Exxon will gain greater access to North Sea oil fields, potential lucrative deals with OPEC kingpin Saudi Arabia, and a stronger presence in the US refining and marketing arena, some analysts have said.