HP is in advanced talks to buy EDS for a figure reported to be between $12bn (£6bn) and $13bn.

In a statement, HP said: "HP today confirmed that it is engaged in advanced discussions with EDS regarding a possible business combination involving the two companies.

"There can be no assurances that an agreement will be reached or that a transaction will be consummated."

EDS said: "In response to market rumors, EDS announced that it is in advanced discussions regarding a possible business combination transaction with HP. There can be no assurance that a definitive agreement will be entered into. "

Neither company plans to issue further comment until an agreement is reached or unless discussions are abandoned.

Such a combination would create an even bigger IT giant in the new HP. The company overtook IBM last year as the world's largest IT supplier, but has always lagged behind in IT services and outsourcing. The purchase of EDS would catapult HP into a new level of competition with global outsourcing leaders such as Accenture and IBM.

A merger between HP and EDS would face many challenges, said Ovum analyst Phil Codling.

"On paper an HP-EDS combination looks workable. But in practice it could prove anything but," he said.

"It's difficult to comment on how an HP-EDS integration might theoretically proceed, but it would inevitably entail risks. Combining services portfolios and delivery platforms to maximise economies of scale would be a huge task.

"Of course people are the greatest asset of a services business and, despite HP's newfound organisational efficiencies under chief executive Mark Hurd, HP would need to move quickly to stem any potential 'brain drain' from EDS."