Mittal Steel was last night closing in on Arcelor after a day of intensive talks between the two sides that centred on a plan by Mittal to raise its €25.8 billion hostile offer for the Luxembourg steelmaker by up to €2 billion.

The Netherlands-based company - whose chairman and owner is the Indian billionaire Lakshmi Mittal - is working on a draft legal document setting out the terms of a merger. The company was confident it would be able to put the terms to Arcelor's 18-strong board at a scheduled meeting tomorrow.

If the merger were approved, it would create the world's biggest steel producer with an output three times higher than its closest rival. Mr Mittal first proposed the merger five months ago, triggering an epic battle between the two companies.

"Some serious talking has been going on about the terms of an improved offer," said a person close to the discussions. "Mr Mittal wants to have a fairly precise document to put to the board setting out a new offer, and which he hopes Arcelor directors will feel they can recommend."

The Mittal/Arcelor talks have mainly involved Mr Mittal and Joseph Kinsch, Arcelor's chairman, and will continue today.

While it is not certain that the discussions will lead to Mr Kinsch agreeing to put a fully-fledged legal document about a Mittal/Arcelor merger to the board, a person involved in the matter from the Arcelor side said: "Mr Mittal badly wants Arcelor. "