The owner of PC World and Currys and Carphone Warehouse are in merger talks that could create an electrical goods and mobile-phone group with a market capitalisation of over £3.4 billion.
Dixons Retail Group is Europe's second biggest electricals retailer, while Carphone is Europe's largest independent mobile-phone retailer.
"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," the firms said in a joint statement to the London Stock Exchange today.
They said the talks were at a "very preliminary" stage and there was no certainty a transaction would occur.
They added that no decision had been reached regarding the structuring of any merger.
Analysts said an all-share merger of equals seemed the most likely deal. At their closing prices on Friday, Carphone was valued at £1.77 billion and Dixons at £1.72 billion.
Dixons chief executive Seb James has made no secret of his desire to increase the company's exposure to mobile phones. Strong demand for smartphones and tablets in Britain has been driving Carphone's share price rise, off setting weakness in its French business.
Analysts said key to any deal would be the stance taken by Charles Dunstone, who founded Carphone in 1989, is its chairman and is its largest shareholder with a 23.5% stake. It has more than 2,000 stores across Europe.
Britain's Takeover Panel will require the companies to announce by March 24 a firm intention to make an offer.
Shares in Dixons, which trails Metro's Media-Saturn by annual sales, have soared 74% over the last year, ahead of gains of 51% in Carphone Warehouse's stock.
Dixons has increasingly focused on markets where it has a leading "multi-channel" position with a combined stores and internet business. Over the last year, it has offloaded the loss-making e-commerce business PIXmania and operations in Turkey and has partially exited Italy.
Dixons has over 500 stores across the UK and Ireland, predominantly in retail parks and increasingly as '2-in-1' Currys PC World stores. There is also a sizeable store estate in northern Europe.
US retailer Best Buy ended a joint venture with Carphone Warehouse last April by selling its stake back to the European firm. Plans to build a chain of European megastores had collapsed because of weak consumer spending and competition from local chains.