Attempts by Royal London to rescue Royal Liver are still in the "very early stages", the mutual insurer says.
Royal Liver has been trying to find a buyer since last summer, following fruitless negotiations with local rival Liverpool Victoria.
In August, the group's chief executive Steve Burnett quit unexpectedly after heavy losses in its financial advisory businesses, Park Row and Citadel.
A spokesperson for Royal London confirmed the group was in talks with Royal Liver, though stressed there was "still a huge number of issues to discuss" before any deal could be struck.
Today's reports of merger talks come amid a sweeping investigation into mutuals by the FSA, dubbed Project Chrysalis, which is expected to see dozens of mutuals forced to find a partner or close down.
The regulator is concerned some mutuals - which are owned by their customers rather than shareholders - may not have enough capital.
A tie-up between Royal London and Royal Liver would create a business with assets of more than £33bn and almost six million customers.
A spokesman for Royal Liver denied the talks as "purely speculation".
It shocks you
2,000 people surveyed
Six FTSE 100 female CEOs earning 32% less than men
It is the 'Second City'