The move comes hard on the heels of new Trade and Industry Secretary Ian Lang's clearance last week of North West Water's pounds 1.8bn bid for Norweb and raises the prospect of further bids among the 10 privatised water companies.
DTI sources indicated an announcement may come before Northumbrian's interim results on Thursday.
Lyonnaise, which already owns North East Water in Northumberland and Tyneside, has been stalking Northumbrian since March. An opening offer pitched at a minimum pounds 10.50 is likely, should strings attached by the DTI be satisfactory.
"Should those requirements be acceptable and should the share price be in reach, Lyonnaise would first seek the recommendation of the North- umbrian board," a source said.
If that is not forthcoming, Lyonnaise is likely to launch a hostile bid within a week of the DTI's clearance.
Northumbrian has so far rebuffed its embrace and is holding out for at least pounds 11 per share, valuing it at nearly pounds 770m.
Key to the offer are cost savings Lyonnaise would have to pass on to 2.5million people in Northumbria and the timetable regulators set down. Some 3,200 jobs are at risk.
Lyonnaise's ambitions were immediately referred to the Monopolies & Mergers Commission, which in July recommended price cuts of 15-20 per cent - around pounds 20 off the average household bill - by the year 2000.
Industry regulator Ofwat, headed by Ian Byatt, has since negotiated with Lyonnaise over an acceptable price regime. His recommendations, delivered to Lang last month, may have relaxed some of the MMC's proposals, including the timetable.
Water industry shares soared after Lyonnaise's approach - Northumbrian immediately jumped 123p to 865p - which came just 10 weeks after government golden shares expired, which had prevented takeovers since privatisation at just 240p in 1989.
Unlike the electricity sector - carved up this year in an orgy of bid- mania - all bids for water companies by rivals involved in water supply automatically get referred to the MMC.
That anomaly, and the MMC's stance so far, means North West Water can cock a snook at customers in bidding for Norweb, but the likes of Lyonnaise will have share benefits widely.
The cost savings imposed and a threatened windfall tax by Labour make an electricity-style bonanza unlikely, analysts say.
Water businesses are also not as cash generative, needing heavy capital expenditure to bring pipes and sewers up to scratch.
Most likely bidders come from overseas, including French giants Bouygues and Generale des Eaux, which like Lyonnaise have already mopped up several of Britain's local statutory water companies.
Sources say Northumbrian is likely to offer cash to shareholders in its defence, as well as savings to customers via a voluntary reduction in its "k-factor", which governs its rate of return.
"It is genuinely opposed in feeling that existing management is proven and they do not feel Lyonnaise has anything to add in terms of savings," a Northumbrian spokesman said.
Interim pre-tax profits on Thursday are likely to come in at pounds 52-pounds 57m against pounds 46.1m last time, with a dividend of up to 11.3p, up from 9.4p.
If Lyonnaise does go hostile, it is likely to be just a phoney war, however, centring on price. Northumbrian had previously looked at taking over North East Water to achieve just the efficiencies Lyonnaise is looking at.
Northumbrian handles all of the county's sewerage but supplies water to just 459,000 households and businesses against North East Water's 530,000. Intriguingly, locally a merger would leave Hartlepool Water supplying a small enclave, with a possible further Lyonnaise "mopping up" on the way.Reuse content