An announcement about the pounds 300m alliance is expected within the next fortnight and could be the precursor to a wider restructuring of the European defence industry.
Sources close to the discussions said that GKN and Alvis were still negotiating each company's share in the merged business.
But they discounted suggestions that the new grouping would be floated separately on the London stock market.
GKN is best known for its Warrior and Piranha armoured vehicles, which are manufactured by a 550-strong workforce at Telford.
Alvis makes the Scorpion and Stormer tracked vehicles at its Coventry plant, which employs 350.
It almost doubled in size last year with its pounds 84m takeover of Swedish armoured vehicle manufacturer Hagglunds.
An alliance between Alvis and GKN would bring Alvis into the pounds 3bn programme to build a "battlefield taxi", which GKN won last year as part of the Eurokonsortium.
GKN, Giat of France and the ARGE grouping of Germany each have a one- third share in the consortium, which has been selected to build 6,000 to 7,000 multi-role armoured vehicles for the British, French and German armies.
Alvis was a member of the losing consortium led by Vickers, the manufacturer of the Challenger 2 tank.
At the time the contest was settled it was predicted that it would lead to a consolidation of fighting vehicle manufacturers in Europe.
The alliance between GKN and Alvis threatens to leave Vickers further out in the cold although there is still a possibility that some three- way tie-up could be constructed.
Vickers will announce about 400 jobs losses in its tanks division on Thursday. The company employs 1,400 at two factories in Newcastle and Leeds.
Production of the Challenger 2 for the British Army will end early next century but Vickers is hoping to win a pounds 1bn contract from Greece for up to 300 tanks.
It is also chasing a smaller order in Qatar.