The merger would create one of the biggest betting firms in revenue and scale.
The combined entity will be called Paddy Power Betfair Plc.
A joint statement said the companies would keep the two "distinctive and complementary" brands and pursue a dual brand strategy in Europe.
PRWeek understands that Paddy Power chief marketing officer Gav Thompson will remain in his role if the merger takes place, although there could be job cuts after talks of cost synergies.
Paddy Power is well known for provocative and sometimes close to the knuckle campaigns including the immigrant lorry unveiled in July (pictured above), and another vehicle featuring a joke about Rolf Harris that was never used but was still apparently leaked via social media.
If the deal goes ahead, Paddy Power shareholders would own 52 per cent of the company, while Betfair shareholders would take 48 per cent.
Paddy Power chairman Gary McGann and Betfair CEO Breon Corcoran will become chairman and CEO respectively of the group. Paddy Power CEO Andy McCue will become COO, while Betfair CFO Alex Gersh will take on the same role.