The fund will include money from other investors as well as borrowings collateralised by assets of businesses to be purchased, the sources said, without giving further details. Under a typical M&A fund scheme, investors take over a company with the aim of listing its shares later or selling it off after restructuring its businesses.

Foreign investors are scrambling to take advantage of active corporate restructuring which has sparked a record level of corporate M&A activity, especially in the nation's financial and information technology sector.

"Japanese firms are becoming bargains for foreigners," said Katsuyuki Kumagai, general manager of information department at Teikoku Databank, a leading credit research firm.

Foreign investors see a high probability of reaping good returns from such takeovers in light of the huge size of Japanese markets, improving financial conditions and highly educated work force, Kumagai said.

In turn, cash-strapped Japanese firms get foreign know-how and financial support to survive increased competition created by sweeping deregulation, he added.

Fuelled in part by foreign buying, the number of M&A cases involving Japanese firms is expected to hit another record exceeding 1,200 this calendar year. Some 826 deals were announced during the first nine months, up 22.5 percent over the same period last year.

With Japanese companies gradually breaking away from their traditional "keiretsu" corporate ties, a further foreign rush to acquire Japanese firms is in sight, Kumagai said.

Also facilitating the move is Japan's banking sector, which is set for dramatic changes including a series of mega mergers creating two of the world's biggest banks by assets.

In September, US investment group Ripplewood Holdings won an official go-ahead to be the first foreign group ever to takeover a Japanese bank. A group of investors led by Ripplewood will takeover the assets and operation of the failed Long-Term Credit Bank of Japan (LTCB), now under state control.Ripplewood also set up a separate $1 billion investment fund in August with the aim of taking over about 10 Japanese manufacturing firms over 10 years.The new M&A fund would cement GE Capital's already prominent position in Japan, where its operation has expanded through a series of corporate takeovers here.

Starting with the purchase of ball-baring maker Minebea Corp in 1994, its long takeover list includes Tokyo-based consumer finance firm Koei Credit KK, Japan's fifth-biggest credit firm Lake Co, and two bankrupt LTCB leasing units.

GE Capital is also negotiating with a Japanese insurance industry body to take over the policy contracts of failed Toho Mutual Life Insurance Co, with which it had formed a life insurance joint venture, GE Edison.