The Gibraltar-based firms are two of the biggest victims of recent US law which effectively makes internet gambling illegal.
According to the Sunday Times the two firms will hold further talks in coming weeks about a £1.6bn ($3bn) merger.
However, Partygaming declined to comment on the reports, while 888 Holdings were unavailable for comment.
Experts have predicted there will be a round of consolidation in the sector following new moves which will make it impossible for Partygaming and a clutch of other British online betting businesses to collect revenues in the US.
'Golden opportunity'
Analysts now expect companies to switch their focus from the huge US market to concentrate more on Europe and Asia.
In recent weeks Partygaming chief executive Mitch Garber has admitted that the upheaval would provide a "golden consolidation opportunity" within the industry.
Market talk has linked Partygaming to possible tie-ups with Gamesys - a major presence in Europe - and bookmaker Victor Chandler, which has significant customer numbers in Asia.
Earlier this month, Partygaming said its decision to exit the US market in the wake of the new legislation would cost it about $250m (£133m).
The company had generated around 75% of its income from the US market while around half of 888 Holding's business came from the country.
The new laws also led to a slump in the gaming sector on the London market. Partygaming shares have sunk by around 70% and 888 by 24%.
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