"In theory, it's potentially a very good match," said Howard Smith, an auto analyst at ING Barings in Tokyo.

DaimlerChrysler AG is the world's sixth largest auto manufacturer and Mitsubishi Motors Corp is Japan's fourth-largest maker of full-size cars. Together they would be the world's third-largest, producing around 6.5 million vehicles annually.

Business daily Nihon Keizai Shimbun said talks were in the final stages and the two were discussing the size of the stake. Other reports said they aimed for an agreement this month.

The German-U.S. auto giant could take control of the Japanese automaker with a holding of 33.4 percent, though Mitsubishi would want to maintain as much independence as possible.

A 30 percent stake would be worth around 92 billion yen ($854.9 million) at current market share prices.

Both companies declined to directly comment on the reports.

"We've been talking to various companies on various topics and at present, nothing has been decided," Mitsubishi said in a statement, a refrain it has long repeated.

Mitsubishi's shares ended bid-only at 413 yen, up by its daily limit, compared with a close of 333 yen Monday. DaimlerChrysler ended in New York Monday at 62-1/8, down 1/07.

But some analysts said a deal may not be a definite shoo-in, and that the stake size could be a thorny issue.

"DaimlerChrysler is probably saying it wants nothing less than 33.4 percent and Mitsubishi is likely trying to keep it at about 25 percent," said Tadayuki Nakamura, an analyst at the Sakura Institute of Research. "The situation still looks uncertain."

Although Mitsubishi and Chrysler have had a long relationship, with Mitsubishi still making Chrysler brand compact cars at its Illinois plant, its relationship with Daimler has been rocky.

The two explored plans for a comprehensive business tie-up in the early 1990s that came to little and was reported to have ended in some ill-feeling.

DaimlerChrysler had also been in talks with Nissan Motor Co early last year but broke them off citing Nissan's debt levels. Mitsubishi has 1.75 trillion yen in debt and analysts had assumed DaimlerChrysler would also balk at Mitsubishi.

Recent market speculation has also centered on Ford Motor Co, which is talking to Mitsubishi about the future of a Dutch joint venture with Volvo Cars, a Ford unit, and is seen by many analysts as a more suitable partner for it than DaimlerChrysler.

Some also speculated that Mitsubishi may be trying to play off DaimlerChrysler against Ford.

This said, both DaimlerChrysler and Mitsubishi are running out of time and this pressure, more than a natural meeting of minds, is likely to have spurred talks. DaimlerChrysler needs to secure a base in Asia, where it is also keen to move into the truck market and the number of potential takeover candidates is small. It is also keen to find a small car partner and Mitsubishi has this expertise as well as its acclaimed gasoline direct injection engine technology. Although Mitsubishi tied-up with Swedish truckmaker AB Volvo in trucks last year, the future of Mitsubishi's passenger car division had been left hanging.

The need to plan for new models at Mitsubishi's venture with Ford's Volvo car unit, which wants to use Ford platforms, also dictated that Mitsubishi and Ford come to an agreement by end-March.

The Nihon Keizai said DaimlerChrysler had agreed to take over the Ford half of the venture.

A DaimlerChrysler-Mitsubishi alliance also throws up a whole lot of implications for other automakers, including questions over the fate of Mitsubishi's tie-up with truckmaker AB Volvo.