A deal could value Wayne, Pennsylvania-based Gardner Denver at about $85 per share, the source said. Gardner Denver's shares closed at $73.68 on Tuesday. SPX has a market value of $3.23 billion, compared to $3.62 billion for Gardner Denver.

SPX's financial advisor Credit Suisse Group AG has been joined by Bank of America Corp and JPMorgan Chase & Co in efforts to raise debt for the deal, the source said on condition of anonymity because the talks are confidential.

A deal could value Wayne, Pennsylvania-based Gardner Denver at about nine times estimated 2012 earnings before earnings, tax, depreciation and amortization (EBITDA), the source said, cautioning details had yet to be finalized.

A deal announcement could come as early as this week though no final agreement has yet been reached and negotiations could still fall apart, the source added.

Depending on the availability of financing, SPX shareholders may be called on to vote on a capital increase to finance the share portion of the bid, the source said.

A Gardner Denver spokesman declined to comment while SPX did not immediately respond to a request for comment. Credit Suisse, JPMorgan and Bank of America declined to comment.

A deal with Charlotte, North Carolina-based SPX would represent a huge premium to the $55 per share level that Gardner Denver's shares traded at before Reuters reported news of a potential sale on October 25.

Gardner Denver passed on private equity firms Advent International, KKR & Co LP, and a consortium of TPG Capital LP and Onex Corp, which made all-cash offers in the mid-to-high $70s per share range, people familiar with the matter told Reuters last week.

The SPX offer was substantially higher, the people said. Some analysts looking at the financial fundamentals of a potential deal have suggested that an offer of up to $90 per share would not be unreasonable.

"Comparing this to a sample of 47 large deals since 2009, we come to the conclusion that implied (valuation) multiples do not look egregious -- the average multiples paid since 2009 has been 2.1 times trailing sales and 12.9 times trailing EBITDA," Morgan Stanley analysts wrote in a note on December 16.

SPX Chief Executive Chris Kearney has worked over the past few years to focus the company on its flow control business, making equipment used in processing liquids ranging from petroleum to dairy products.

Gardner Denver makes compressors, pumps and vacuum products for industrial uses. Its decision to explore a sale followed months of pressure from activist investor ValueAct Capital LLC, which acquired a roughly 5 percent stake.

The shareholder campaign followed the sudden resignation of Chief Executive Barry Pennypacker in July and his interim replacement by Chief Financial Officer Michael Larsen, who last month was appointed as permanent CEO.

Gardner Denver has grappled with lower demand for petroleum and industrial pumps, which pressured its engineered products group. That group reported a 20 percent drop in revenue in the third quarter.

(Reporting by Greg Roumeliotis in New York; Additional reporting by Michael Erman in New York; Editing by Ryan Woo)

• A Permanent Economic Emergency