Marsh & McLennan is undertaking due diligence on Heath Lambert in preparation for an acquisition worth more than £350m.

If successful, the deal would bring together the UK's sixth largest broker into the world's number two.

The prospect of the acquisition comes after Heath Lambert came within a whisker of a float last year. It was called off due to stock market volatility.

The float would have valued the group at between £406m and £469m.

Both companies declined to comment, but Heath Lambert is understood to be refusing to rule out another flotation attempt and has received other approaches.

Market sources suggested it has been losing business recently to Aon and Willis, but is valued by Marsh for its strong presence in the Far East.

Heath Lambert's float plans had included an intention to repay debt and inject £25m into its pension fund. Its debt levels are likely to be important to the negotiations with New York-based Marsh.

The group made an operating profit of £49m on turnover of £279m in the year to March 2002 and about a third of its profits come from overseas.

About two thirds of Heath Lambert is owned by venture capital firms including Phoenix, Candover and Advent.