London Guildhall University and the University of North London plan to merge creating a 25,000 student body, one of the largest in the country.
The two institutions announced plans this week for strategic collaboration with a view to merge in September 2002. The University of East London is likely to get involved.
Roderick Floud, vice-chancellor of London Guildhall University, said: "We are two relatively small institutions constrained by our capital inheritance and scale of provision, and facing similar challenges.
"The two institutions have specialisations and by collaborating, we can greatly widen opportunities for students. We have similar missions and are physically close. The collaboration should provide greater stability and a basis for growth."
Both institutions have had financial and industrial relations difficulties. But, Professor Floud said there were no plans to axe jobs as a result of closer ties.
"We have been struggling under the impact of funding cuts and people have had to spread themselves more thinly. The collaboration should enable people to play to their strengths,"he said.
In a letter to staff, Brian Roper, University of North London vice-chancellor, said: "This represents the start of a long process of thorough investigation involving full and wide consultation... before any final decision is made." He said all three universities would continue to approach the issue in a measured way, reflecting the diverse constituencies they represent.
The University of East London is under emergency funding council supervision because of its financial situation. It would have to implement a recovery plan before a merger could go ahead.
Frank Gould, its vice-chancellor, said: "Our student profiles are similar, our missions are similar and all three of us have been involved in widening participation and making a contribution to the local economy. Strategic alliances are the way of the future because there are a lot of us paddling in the same pool."
Sir Brian Fender, chief executive of the Higher Education Funding Council for England, said: "I welcome the decision of two strong universities to consider how they could become even stronger and serve the needs of their communities."