The restructuring deal will bolster cash-strapped Tonggang, the official said.

"Shougang President Zhu Jinmin recently visited some of our subsidiaries including a cold rolling plant. The deal is likely to be inked this month," he said.

Zhang Wenzhe, a Shougang spokesman, refused to comment on the issue and said he had no idea about such a plan.

"Tonggang's rapid expansion in recent years has created a huge debt burden and reduced earnings potential. A takeover by Shougang will help improve Tonggang's capital position and boost its technical capabilities," said Xu Xiangchun, an analyst with Mysteel.com, a market research and analysis company.

Earlier reports had said that the Tonghua government has approved the Tonggang restructuring, and Shougang may inject around 2 billion yuan ($293 million) to acquire a majority stake. Tonggang is the largest State-owned steel producer in Jilin province.

The move is also in line with Shougang's plan to expand its presence in northern China, especially after it set up a new plant in Caofeidian, northern Hebei province, to boost annual capacity, analysts said.

Shougang, the country's sixth-largest steel mill, expects its Caofeidian plant to have an annual crude steel production capacity of 9.7 million metric tons by the end of this year.

Shougang's takeover of Tonggang followed a buyout attempt of the latter by Jianlong Group, which was halted in 2009 by the provincial government of Jilin after Tonggang workers protested job losses and killed the general manager of the mill.

Ansteel, the country's second-biggest steelmaker, was also reported by local media to have shown interest in buying Tonggang for strategic purposes.

The acquisition move also comes on the back of the Ministry of Industry and Information Technology's plan issued in 2009 to restructure and revitalize China's steel industry. The plan envisages the nation having three to five super-large steelmakers with each having annual production capacity of more than 50 million tons as well as some large-sized mills with an annual capacity of 10 to 30 million tons by 2011.

The plan also encourages mergers and acquisitions of small steel mills to consolidate the industry.

Shares of Beijing Shougang Co, the listed arm of Shougang Steel Group, edged down by 0.27 percent, to close at 3.72 yuan in Shenzhen on Wednesday.