The two, which have been seen as a possible combination for the last several years, cautioned that the discussions could still fall apart.
Nokia ADRs slumped 4.5 percent to $7.93, while Alcatel ADRs jumped 8.1 percent to $4.70.
It isn’t clear if the parties have agreed on a valuation. Alcatel-Lucent’s market capitalization stands at roughly €11 billion ($11.63 billion), while Nokia’s market capitalization is about €28 billion.
A merger would increase pressure on other major telecom manufacturers, including Ericsson of Sweden, which holds the largest market share in the sector. In recent years, a number of Chinese competitors, including Huawei and ZTE, have also become major challengers for new contracts with global carriers, particularly those in Asia.
The combined company would have sales of around 26 billion euros, compared with 24.4 billion for Ericsson last year and 37.44 billion for Huawei, which also sells handsets so is not an exact comparison.
Last year, Nokia completed the sale of its handset business to Microsoft for roughly $7.2 billion to focus on building equipment used to power cellphone networks by the world’s major carriers like AT&T and Vodafone.