Should the merger go ahead, the newly-created firm, with 47 partners, would rival the North East's current largest practice, Dickinson Dees, which has 48 partners and a total staff of more than 340.
However, sources in Newcastle doubt whether Watson Burton will be a good merger partner for 28-partner Ward Hadaway.
One senior Newcastle lawyer says: "I think no one would deny the existence of the talks. But if they put both firms together they have to look at if it will work in the medium to long-term."
Another senior Newcastle lawyer is surprised Watson Burton would be interested in merging with anyone.
He says: "Watson Burton is an older partnership and is less ambitious.
"There are risks involved and the reservations are all from the older partners."
Ward Hadaway told The Lawyer in August it was planning an extensive expansion programme. It plans to double its fee income by April 2000 and increase its staffing levels by 60 per cent.
Managing partner Jamie Martin said at the time: "Our plans are very ambitious and are more likely to be achieved through mergers and bolt-ons."
One source concedes the two practices need to take immediate action if they are going to survive in the burgeoning north-east market.
He says: "Both firms realistically know they cannot compete with firms like Eversheds and Dickinson Dees. They need to get bigger.
"[Their] strategies are not taking them anywhere. But they need to decide where [the merger] would take them in the market."
Ward Hadaway has ruled out merger with firms outside the region. Other prominent local practices include Jacksons, which has offices in Leeds, Stockton-on-Tees and Middlesbrough as well as Newcastle, and 20-partner Crutes, which is based in Newcastle.
Merger talks between Jacksons and Crutes collapsed earlier this year through "operational concerns and potential client conflict" (The Lawyer, 8 March).
Watson Burton and Ward Hadaway are unavailable for comment.