The owner of PC World and Currys has revealed it is in talks with mobile phone retailer Carphone Warehouse about a potential merger.
Dixons Retail Group said the discussions are at an early stage and that no decisions have been made about how a tie-up might be structured.
Both companies are valued at around £1.8 billion on the London stock market, following a rise of 5% for shares in Dixons and 3% for Carphone Warehouse.
Carphone was founded in 1989 by Charles Dunstone, who still owns 23% of the company. It has more than 2,000 stores across Europe.
The business was recently boosted by a major deal to open 60 Samsung-branded stores across Europe, including a third on UK high streets.
Dixons has more than 500 stores across the UK and Ireland, predominantly in out-of-town retail parks and increasingly as '2-in-1' Currys PC World stores. There is also a sizeable store estate in northern Europe.
Both companies have weathered the difficult trading conditions in UK retail, with Dixons recently reporting its second year in a row of improved Christmas trading as it benefits from the demise of rival Comet.
Carphone recently said like-for-like revenues rose 5% in the UK during the quarter to December 28 as its performance was boosted by the popularity of more expensive smartphones.
The two companies said today: "The boards of Dixons and Carphone Warehouse note the recent speculation and confirm that the two companies are in preliminary discussions regarding a possible merger of Dixons and Carphone Warehouse.
"These discussions are at a very preliminary stage and there can be no certainty that a transaction will be forthcoming. No decision has been reached regarding the structuring of any such merger."
Rupert Eastell, head of retail at professional services firm Baker Tilly, said: "This proposed merger offers more obvious advantages for Dixons, who would benefit from the mobile technology expertise and customer service ethos of Carphone Warehouse, in addition to new 'click and collect' opportunities.
"Carphone, on the other hand, is set for steady growth, it is very focused on store profitability and has a model that works, so it doesn't appear to have so much to gain."