The Australian stock market reacted harshly to yesterday's news that Southcorp could be about to swallow one of its closest competitors in the Australian wine industry, Rosemount Estate Wines.

Shares in Southcorp, Australia's second largest wine producer, fell 4% as $A0.23 was sliced of their value.

Both Southcorp and Rosemount are still declining to confirm the merger but it is believed the two companies are working on a deal for Southcorp to buy Rosemount for about $A1.5 billion in cash and shares.

The Sydney Morning Herald reported today that a source close to the company said the two were trying to conclude talks "sooner rather than later" especially in the light of recent heavy trading in Southcorp shares.

As reported last week, an unusually high number of Southcorp shares have been traded recently prompting speculation one of the large multinational drinks companies, in particular Allied Domecq and Diageo, was about to launch a takeover bid.

If a deal between Southcorp and Rosemount goes ahead it could be read as a defensive measure to thwart any unwanted takeover attempt on Southcorp.

However, despite the volume of interest the reported Rosemount/Southcorp merger has generated, Rosemount has continued to deny any deal. A spokeswoman told yesterday that the company had assured employees that Rosemount would remain independent.