AOL Time Warner is in talks about selling a majority stake in its Warner Music business to music company EMI Group, the Wall Street Journalhas reported.
The report said any deal would likely be valued at around $3 billion to $4 billion.
Sources close to both companies said EMI had been holding "informal talks" with Warner Music about joining forces after a previous attempt to merge three years ago fell foul of European regulators.
Sources said EMI has also been talking to rival BMG, owned by German media group Bertelsmann, which it also previously tried and failed to merge with.
EMI, Warner and BMG have come under increasing pressure to consider a link-up with one of their rivals to cut costs as the music industry faces one of its worse downturns in decades.
In EMI's last round of merger attempts with Warner and then BMG, European regulators made clear they would not accept the world's five biggest media companies shrinking to four.
But given the recent slump in the music industry, some believe regulators may be more accepting of a merger now.