Nasdaq OMX Group Inc is closer to making a counter-bid for NYSE Euronext , a source familiar with the situation said, a move that would challenge the Big Board's blockbuster deal with Deutsche Boerse by merging two of Wall Street's fiercest rivals.

Under the offer being contemplated, the Nasdaq Stock Market parent would finance the transaction with up to $5 billion in debt and sell NYSE Euronext's Liffe derivatives business to IntercontinentalExchange Inc , the source said on Monday.

An offer could come as early as this week, the source said.

Bringing Nasdaq and the New York Stock Exchange parents together would create a stock-trading powerhouse in the United States and Europe that would also dominate the business of listing U.S. public companies, and dwarf other U.S. options markets.

If successful, such a counter-offer would redraw the global exchange map and thwart yet another merger plan by Germany's Deutsche Boerse. It would be a bold move by Nasdaq Chief Executive Robert Greifeld, who has a mixed deal-making record.

ICE, an Atlanta-based futures specialist, would meanwhile nab London's Liffe platform -- a profitable gem that would give CEO Jeffrey Sprecher an interest-rate business that eluded him when ICE's bid for the Chicago Board of Trade failed four years ago.

Any bid would follow weeks of speculation that Nasdaq -- seen as the odd man out of a global mergers frenzy among exchanges -- would jump into the fray.

But with the deals driven largely by a need to diversify and ramp up profitable derivatives trading, such a move by Nasdaq to expand in its core, low-margin, stock-trading business could raise questions for shareholders.

I would be shocked if this happened, Sang Lee, managing partner specializing in market structure at Boston consultancy Aite Group, said of a possible Nasdaq-NYSE tie-up.

If the game is to create a viable, long-term business that can compete globally, doing something like this is probably a step backward, he said.

Nasdaq, NYSE, and Deutsche Boerse declined to comment. ICE was not immediately available for comment. The source declined to be named because the talks are not public.

A source familiar with the situation told Reuters last month that Nasdaq was exploring options that include teaming up with a partner like ICE on a rival bid for NYSE.

There is a relatively steep 250 million euro ($347.5 million) termination fee on Deutsche Boerse's friendly $10.2-billion offer for NYSE Euronext, which the companies unveiled February 15 and expect to close this year with shareholder approval.

The news on Monday lifted NYSE's share price as investors weighed the prospects of a possible bidding war, which last erupted in the exchange industry between ICE and Chicago derivatives giant CME Group Inc in the 2007 battle to buy CBOT.

When you see possible bidding wars there's a reason for it, and exchanges have been making piles of money from the high-frequency traders, said Richard Gates, portfolio manager of TFS Market Neutral Fund, which has about $1.4 billion in assets.

DEALS AND EGOS

Earlier on Monday, deal publication DealReporter reported Nasdaq is in advanced talks with lenders about funding a hostile bid. The exchange operator would finance the bid with debt from banks led by Bank of America Corp and $5 billion in asset sales, DealReporter said.

Bank of America declined to comment.

In a flurry last month, Deutsche Boerse agreed to buy NYSE, the London Stock Exchange Group Plc announced a deal to take over Canadian market operator TMX Group , and BATS Global Markets said it will buy peer Chi-X Europe.

The frenetic activity revived a consolidation wave that last swept exchanges between 2006 and 2008 and raised some thorny questions over whether politicians and regulators would ultimately block them. Some U.S. lawmakers said they were concerned that a German company would buy the NYSE, the proud symbol of U.S. capitalism.

Nasdaq and NYSE seems like a better fit, not to mention the domestic pressure to keep NYSE control in the U.S., which should help with some of the regulatory hurdles, said Dennis Dick, a Detroit-based market structure consultant and trading member at proprietary firm Bright Trading.

Deutsche Boerse, now under CEO Reto Francioni, failed in at least three past attempts to merge with the standalone Euronext, which runs the Paris, Amsterdam, Brussels and Lisbon bourses. Francioni would be chairman of the combined entity, while NYSE's Duncan Niederauer would be CEO.

The NYSE in 2007 bought Euronext, which also owned Liffe.

Greifeld, Nasdaq's head since 2003, bought Scandinavia's OMX Group in 2008 after a drawn-out and ultimately failed attempt to wrest control of the LSE. His New York rivalry with Niederauer has been particularly intense in the battle for new -- and switchover -- listings the last few years.

Taken together, Nasdaq and NYSE's various venues execute nearly half of all U.S. cash equities trades. Their four options exchanges had about 51 percent market share last month, according to the Options Clearing Corporation.

Shares of NYSE Euronext closed up 4.5 percent at $36.55 in New York. Call options on NYSE Euronext also heated up Monday, with one trader saying the activity suggested some traders are betting on a bid before this Friday's expiration.

Nasdaq's shares closed down 3 percent at $26.37, while ICE was off 1 percent at $124.79 on the NYSE.

(Reporting by Paritosh Bansal and Jonathan Spicer; additional reporting by Doris Frankel in Chicago and Soyoung Kim in New York; editing by Bernard Orr, Gary Hill)