A consultative green paper circulated to staff at the two universities "sets out a case for collaboration" while avoiding the word "merger".
But the paper states that a single institution, which it terms LLU, would rank seventh in the UK for research power and have a strong international presence through existing and new overseas campuses.
A Lancaster spokeswoman said that the university "is in major discussions with Guangdong Foreign Studies University in China to open a campus to be known as Guangwai-Lancaster University".
Asked if the plan would amount to a merger, Paul Wellings, Lancaster's vice-chancellor, said: "I don't think so. We are talking about elements where we might come together for greater collaboration...(about) whether there is an argument to create a federal structure."
Professor Wellings, who is to leave Lancaster at the end of 2011, added: "We have in mind the University of California system or the Swiss Institutes of Technology.
"We are not looking at a merger qua Manchester and Umist (the University of Manchester Institute of Science and Technology)."
He said the key context was not competition from other UK universities, but the structural changes happening in India, China and elsewhere. "Within 10 to 20 years, something like 30 per cent of the top 200 universities in the Times Higher Education World University Rankings will most probably be from those sorts of countries," he said.
Mike Robinson, national education officer for the union Unite, said there were "concerns about the whole collaborative project, especially on jobs" and fears that "some research could be cut back to enable concentration in other areas".
The green paper notes that both Lancaster and Liverpool have "planned expansions" in China and India. "The LLU collaboration would be unique - for example, if current plans go ahead there will be two campuses in China and two in India," it adds. The paper also states: "Other groups of leading universities are thought to be exploring similar models of collaboration."
Without action, both universities will suffer a "relative decline" as UK research funding becomes more concentrated and emerging nation universities strengthen, the paper says.
It includes a table showing "research power" (measured by 3* and 4* research as a proportion of total submissions to the 2008 research assessment exercise), which puts Liverpool in 18th place in the UK and Lancaster 23rd. With their strengths combined, the proposed LLU federation is ranked seventh, behind Imperial College London.