Sprint has more than 23 million customers

With 38.5 million subscribers and revenues of $30bn (�15.6bn), the firm would be well placed to take on market leaders Cingular and Verizon.

Nextel has high average revenues per user thanks to its "walkie talkie" style service on mobiles.

But by combining, both firms would save billions as the industry gears up for investment in new high speed networks.

"We believe consolidation may ultimately increase levels of competition in the sector, which is good for consumers, regulators, and providing scale to a third competitor," said Michael Bowen, an analyst with Friedman, Billings, Ramsey & Co.

Market rumours

According to the Wall Street Journal the companies have reached "tentative agreement" on a deal that would value Nextel at about $36bn.

Sprint will reportedly issue 1.3 of its shares for each share of Nextel, and also include a cash payment.

Sprint chief executive Gary Foresee will head the company with Nextel's Timothy Donahue taking up the role of executive chairman, the Wall Street Journal said.

Sprint, which is based in Kansas, and Nextel, which is based in Virginia, have declined to comment on what they called "market rumours".

Analysts believe the two companies would have a number of benefits.

For example, all US mobile carriers are planning to invest in third-generation (3G) mobile networks and a combined company could get the geographic reach without spending as much per subscriber.

Sprint recently placed multi-year contracts with a number of telecoms equipment suppliers for CDMA2000 1x 3G infrastructure, while Nextel has yet to choose the 3G technology it will adopt.

Industry consolidation

Vodafone owns 45% of Verizon, which is said to be watching developments closely and has not ruled out making a move.

The talks come just six weeks after Cingular, jointly owned by US telecommunications companies SBC Communications and Bell South, became the US' largest cellular operator by completing its acquisition of AT&T Wireless.

This began the process of what now looks like industry consolidation.

The fourth player in the US market is T-Mobile, the mobile arm of Deutsche Telekom, which runs T-Mobile USA.