Tata Steel is planning to take a stake in Thyssenkrupp's European steel unit, German business paper Rheinische Post reported, citing government sources in Berlin.
Talks are at an advanced stage, the paper said, adding several scenarios were being discussed, the most likely being a joint venture with Tata Steel holding an option to increase the stake at later stage.
The paper said a spokesman for Thyssenkrupp declined to comment on the report, but he added a consolidation in the steel sector made sense.
The company was not immediately available for comment when contacted by Reuters.
A European spokesman for Tata Steel, which on put its British operations up for sale earlier this week, declined to comment.