In an unsourced story, French financial newsletter La Lettre de l'Expansion said a pre-merger deal is thought to have been signed last week.
In Frankfurt trading, shares of Bristol-Myers Squibb jumped 7.5% to close at 21.66 ($27.99). On the New York Stock Exchange, Bristol shares soared $1.22, or 4.7%, to $27.43.
Shares of Sanofi-Aventis slipped 1.4% to finish at 69 euros ($89.16) in Paris. The company's U.S. traded shares lost 77 cents to $44.57 on the NYSE.
Buying U.S. drugmaker Bristol-Myers would be a coup for Sanofi's ambitious chairman and veteran dealmaker, Jean-Francois Dehecq, who is due to retire at the end of 2009.
The acquisition of Bristol-Myers — which has a market value of around $51.5 billion — would see France's Sanofi leapfrog Pfizer (PFE) as the biggest pharmaceuticals company by sales and push GlaxoSmithKline (GSK) back into third place.
Sanofi and Bristol-Myers have long been considered possible merger partners, because they work together in marketing the hugely successful blood thinner Plavix, and hypertension drug Avapro.
Sanofi-Aventis and Bristol-Myers declined to comment.
Still, many analysts and industry executives are convinced Sanofi oculd have been taking a long, hard look at U.S.-based Bristol-Myers in recent months.
"This wouldn't surprise me. Sanofi needs increased exposure to the U.S. market. They have substantially deleveraged their balance sheet since they took over Aventis, so they are prone to do something going forward," WestLB analyst Oliver Kaemmerer said. Any bid could be a mixture of cash and shares, he said.
Novartis Chairman and Chief Executive Daniel Vasella said only last month that he believed such a deal could be on the cards. "I would not be surprised if companies, which are connected via products — like Sanofi-Aventis and Bristol-Myers Squibb — think about a merger," Vasella told a Swiss newspaper.
Sanofi, with a market capitalisation of 95 billion euros ($123 billion), is more than twice the size of Bristol-Myers, but its shares are less highly rated, and analysts believe an acquisition could significantly dilute Sanofi earnings.
Bristol-Myers, whose shares have been buoyed in recent months in part by takeover speculation, trades on around 21 times forecast 2007 earnings while Sanofi fetches 13.3 times, Reuters data show.
Analysts believe any final deal for Sanofi to buy its smaller U.S. partner is likely to be contingent on the outcome of litigation surrounding blockbuster Plavix.
A key court case over Plavix patents opened in the United States last week, with the two allies fighting a challenge from Canadian generic drugmaker Apotex. A verdict is not expected before the third quarter of the year.
Most analysts bet Sanofi and Bristol-Myers will win the case, which could then clear the way for a full-blown merger.
Bristol-Myers has been seen as vulnerable to a takeover for some time, following management upheaval, while Sanofi would benefit from adding the U.S. firm's many experimental drugs to its pipeline.
"We predicted Sanofi would be the only company to move before the Plavix verdict, since the value of both companies move in the same direction with the verdict," Bernstein analyst Gbola Amusa said.
"Any CEO who uses his stock to buy Bristol-Myers may fear losing his job if Plavix is lost in courts. That is why most bidders will want to wait. Sanofi, though, may want to move now before others can bid for Bristol-Myers," he said.
Any bid would need the backing of Sanofi's main shareholders — cosmetics company L'Oreal and oil company Total. They jointly own a stake of about 24% in Sanofi-Aventis and 37% of its voting rights.
Total or L'Oreal officials were not immediately available to comment but Total has said it plans progressively to sell its stake and L'Oreal has said its holding is purely financial.
While some analysts focused on benefits of merging the two companies' pipelines and cutting costs, others saw snags.
Dresdner Kleinwort analysts said an agreed deal with Sanofi seemed unlikely since Bristol-Myers had just signed a joint venture with AstraZeneca on diabetes.
Contributing: Noelle Mennella and Sudip Kar-GuptaCopyright 2007 Reuters Limited