"The tie-up is now entering a material stage. The two parties have decided to work out a detailed merger plan by October 1," 21st Century Business Herald reported, citing sources familiar with the matter.

SAIC and parent of Nanjing Automobile have signed a letter of intention on July 27 to discuss "comprehensive cooperation" between the two companies through cooperation and restructuring.

Beijing has been encouraging restructuring and consolidation in the auto industry to create a few giants strong enough to compete with global players.

Under the plan, SAIC will have 100 percent of Nanjing Auto and in exchange Yuejin Auto Group, the current parent of Nanjing Auto will hold some stakes in SAIC and its listed unit Shanghai Automotive Co Ltd, the report said.

Chinese media said authorities were also concerned about competition between the two groups, which share the same technology, derived from the former British carmaker MG Rover.

Nanjing Auto launched production of two MG sports car models earlier this year, after beating SAIC and buying the rights to the historic cars from British bankrupt car maker MG Rover Group in July 2005.

SAIC bought the rights to two Rover models but not the brand name, instead founding its Roewe marque last October.

State media has reported that SAIC sold about 840,000 vehicles in the first half, up 23 percent from a year earlier.

Nanjing Auto and SAIC were not immediately available for comment.

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