Nakheel is the larger of the two, with projects worth $42bn under development. Istithmar Real Estate has more than $10bn worth of assets and projects.

The two companies declined to comment on their merger plans. However, a senior source at Nakheel confirms talks are at an advanced stage, and says a formal announcement is expected to be made by the end of 2007.

The projects and assets held by the merged company could be used as a source of further finance for Nakheel. It has already been raising significant sums in the past two years to finance its operations.

In 2006, the company issued the world's largest sukuk (Islamic bond), worth $3.52bn, and then launched a $1.85bn ijara (Islamic mortgage) facility in 2007. It recently decided to put its residential assets into a real estate investment trust. It also says it could list its shares on a stock market in the next two years.

Nakheel executives have been talking about expanding the company's operations overseas for more than three years, but so far it has concentrated on developments in Dubai.

These include the three Palm islands, The World and Dubai Waterfront, although none of these projects has yet been completed.

The deal will also give Nakheel access to Istithmar's development projects, complementing its project portfolio in Dubai.

By gaining an international presence, Nakheel will be following other Dubai-based developers who have already pursued projects overseas. Emaar Properties, Sama Dubai and fellow Dubai World company Limitless have developed a range of projects in the region, and in South Asia and the Far East.

Istithmar already owns prime assets in mature markets and is committed to projects in emerging markets. In London, its properties include One Trafalgar Square, while in New York it owns a series of prestige properties, including 280 Park Avenue, 230 Park Avenue, the Knickerbocker Hotel in Times Square, the Mandarin Oriental at the Time Warner Centre and the W Hotel Union Square.

In Africa, Istithmar is part of a consortium building the Mazagan resort in Morocco.

It is also developing the V&A Waterfront in South Africa, the Kempinski Palace Hotel in Djibouti City, and resorts in Zanzibar and the Comoros islands.

In Asia, it is part of a joint venture building two mixed-use towers in Singapore, and in Thailand it has acquired an 80 per cent stake in a hotel development in Bangkok.

Together with a local partner, it will build and operate a resort in Koh Samui. It is also part of a joint venture to develop and own Tune Hotels in Southeast Asia.

In Dubai, Istithmar is developing the Canal Point development on Sheikh Zayed road, and owns the QE2 cruise ship, which has been converted into a floating hotel and will be moored alongside the Palm Jumeirah. It is also the franchise holder for Easy Hotels in the Middle East, North Africa, India and Pakistan.

The company has made a commitment to invest in Al-Burj Real Estate, which is the primary investor in phase one of the Madinat al-Arab, part of Nakheel's Dubai Waterfront development.

The scheme will include the tallest tower in the world, Al-Burj, which is expected to be about 1,200 metres high, considerably lower than the initial plans for a 1,600 metre-high building.

However, when it is completed, it will be taller than the current record holder, Burj Dubai, which is expected to exceed 800 metres on completion.

Dubai World also holds stakes in companies involved in the hospitality, retail, logistics and transport sectors, including ports operator DP World, finance group Arcapita and casino operator Kerzner.

In total, it has more than 50,000 staff across 100 cities around the world.

TABLE: Nakheel projects