``The new entity, which will combine London Stock Exchange Plc and almost all of Deutsche Boerse AG, is the most significant step yet toward creating a pan-European stock market,'' the Wall Street Journal Europe report said. Wednesday's announcement was also expected to include a statement of intent for the new exchange and US Nasdaq to take stakes of about 10 per cent in each other, following the planned flotation of the US exchange, it said.

Handelsblatt quoted stock exchange sources as saying the Madrid and Milan exchanges had expressed an interest in cooperation and negotiations were already underway. The partners of Euronext, the alliance between the Paris, Amsterdam and Brussels stock exchanges announced last month, were also "making eyes" at the London-Frankfurt merger, which is expected to be finally announced on Wednesday, the German newspaper said.

Such a move would particularly make sense for Amsterdam which already has close links with London. The London Stock Exchange was expected to decide on the merger with Frankfurt at a meeting on Tuesday, after Deutsche Boerse, the company which operates the German market, voted unanimously in favour of the tie-up on Friday, Handelsblatt said.

The merger is expected to announced officially at a news conference in London on Wednesday. Deutsche Boerse has so far refused all comment. The London Stock Exchange is nearly twice the size of the Frankfurt market in market capitalisation but the German exchange has a broader range of businesses and is more profitable, the Wall Street Journal report said. The aim would be a 24-hour market spanning the key US, Asian and European time zones, giving investors access to stocks and initial public offerings via one trading platform. A link-up between Nasdaq and London and Frankfurt would mean the abandonment of Nasdaq's plan to expand separately into Europe, the Financial Times reported last week.