Intel is promoting ultra-thin laptops, known as ultrabooks, to counter tablet computers from Apple Inc. Earlier this year, the US chipmaker signed deals with several panel makers to ensure adequate supplies for a wave of ultrabooks with touch screens expected to hit the market following Microsoft's launch of Windows 8 in late October.
Sharp, with its TV business in retreat, is looking to small displays to spark a revival in its fortunes. Rather than nestle deeper in Apple's supply chain, Sharp sees the new generation of ultrabooks as a fresh market for its most advanced displays.
Intel is attracted by Sharp's technology for small and midsize LCD panels, the sources said, declining to be identified before an official announcement.
The jewel in Sharp's technology portfolio is the IGZO display. It consumes much less power than conventional LCD displays, is thinner as it requires less backlighting, has a highly-sensitive touch screen, and boasts very high definition.
All of those advantages that Sharp's chief financial officer, Tetsuo Onishi, said this month make it a perfect fit for ultrabooks using Microsoft's latest operating system.
Ultrabooks, which critics say may be too expensive for many consumers, are Intel's big bet to reinvigorate a personal computer industry that is stagnating due to consumers' growing preference for tablets and smartphones.
With panel supplies a significant priority at Intel right now, a deal with Sharp would be consistent with previous agreements the top chipmaker has made to strengthen its supply chain, a source close to Intel said.
In July, Intel said it would spend more than $4 billion to buy as much as 15 percent of Dutch chip gear-maker ASML and fund its research into costly next-generation manufacturing technology.
Sharp's stock jumped on Friday after a local media report said the Japanese display maker was in negotiations to make Intel its biggest shareholder.
The sources said the talks are focused on sealing a business alliance, although they did not rule out the possibility of Intel acquiring a stake in Sharp in the future.
Sharp, which is in talks to sell a stake to fellow Apple supplier Hon Hai Precision Industry Co, denied the report by the Mainichi newspaper.
Sharp, in the middle of crafting a restructuring plan to secure financial support from lenders, wants more than 30 billion yen ($383 million) from Intel, the newspaper said.
An Intel spokesman declined to comment on the report.
The Japanese company said last week that talks to sell a 9.9 per cent stake to Hon Hai had stalled as the Taiwanese company sought a say in Sharp's management in return for the investment.
Hon Hai Chairman Terry Gou did not address the issue of the planned investment in Sharp at a media briefing on the Taiwanese company's 4G business plans in Taipei on Friday. He also declined to take questions on the Sharp deal.
With as much as 360 billion yen of short-term commercial paper loans to repay, Sharp needs cash. For now, the maker of Aquos TVs is relying on its main banks Mizuho Financial Group and Mitsubishi UFJ Financial Group for funding.
Sharp is expected to complete the revival plan within days to present to the banks, which will decide to provide about 200 billion yen in additional loans, the sources said. The plan includes the sale of its US solar power unit Recurrent Energy bought in 2010, they said.
Sharp expects a net loss of 250 billion yen in the year ending March 31, after losing 376 billion yen in the last financial year.
Shares of Sharp rose 5 per cent to 212 yen on Friday. Intel's stock fell 0.1 per cent at $23.15 on Nasdaq.