Ladbrokes' shares have surged as investors placed bets on a mega merger with rival bookmaker Gala Coral to create the UK's largest gambling firm.

Ladbrokes said it was in early discussions with Gala to potentially merge, forming a business with nearly 4000 betting shops.

Shares in FTSE 250-listed firm Ladbrokes raced more than 10 per cent higher on Tuesday.

But the deal raises possible competition concerns over a tie-up between the second and third largest bookmakers in Britain and brings back memories of an attempt by Ladbrokes to snap up Coral 17 years ago.

Ladbrokes tried to buy its smaller rival in 1998, but was forced to give up after the then British trade and industry minister Peter Mandelson said the deal had to be unwound on competition grounds and fears it would disadvantage punters.

If the deal goes ahead this time, the merged group will overtake William Hill as the biggest UK bookmaker.