The University of Bradford and Bradford College are to take the first steps towards merger after pledges of support from funding bodies.
Financial backing has been secured from the Higher Education Funding Council for England and from the Learning and Skills Council. A feasibility study is to begin by the end of this month.
Nick Andrew, the university registrar and secretary, said: "The two institutions are in an advanced state of discussions with the funding councils about the way forward, and we have identified a consultant who will undertake the feasibility study."
Alan Hodgson, principal of Bradford College, said the study would devise merger proposals for the two governing bodies, leading to the creation of a new kind of integrated institution.
"We have a vision and we need to know whether it can be realised," he said. "Both institutions need to increase significantly their student numbers, and continuing to offer more of the same provision is not a realistic way to achieve growth. We need to be able to offer different kinds of programmes and different kinds of delivery."
Ideally, a merged institution would increase full-time higher education students from a combined total of 10,000 to 15,000 in five years, Mr Hodgson said.
Bradford was a difficult market, he said. People living and working there praised the city's cultural diversity while outsiders could be deterred by associations with racial tension.
Lack of investment and entrepreneurial vision in the institutions have compounded problems. Educational attainment is low and recruitment to both has been a struggle.
Mr Hodgson said the new institution would develop progression routes from further education through to PhD level, pursue excellence in research and support economic development of the city and region.
Hefce said the merger was the kind of innovative restructuring it was in favour of, particularly when the aim was to widen participation.