PartyGaming, the operator of the world's largest online poker website, moved to kickstart the consolidation of the busy online gaming sector by embarking on a preliminary approach for smaller rival Empire Online.

PartyGaming, the sector leader that only floated on the stock market some four months ago, stressed that the approach was both preliminary and non-binding, although early-stage suggestions put a value of about £400 million on a potential offer.

Empire Online has already been approached once this year - by Sportingbet - as the burgeoning world of internet gaming threatened to embark on a mergers and acquisitions spree. But after an initial price of £790 million was set for the group, the talks broke down in September after due diligence was completed.

Empire Online has also admitted that recent defensive moves by PartyGaming, which is a partner as well as a rival, will dent its full-year profits.

Amid ongoing worries that the online gaming is losing momentum in terms of revenue growth, PartyGaming said this morning: "Any offer proposal would depend upon, in particular, PartyGaming being satisfied as to a number of material pre-conditions, including due diligence and the prospects for Empire's business."

Empire, which makes some of its revenues from directing traffic to other sites, warned last month its after-tax profits for the year would be 10 per cent lower after PartyGaming moved to ringfence its poker players from "skins" such as Empire.

But today's approach was enough to send shares in Empire Online more than 7 per cent higher in early deals - and add £25 million to a market capitalisation that now stands in excess of £365 million.

After two hours of trading - and with no mention of potential price by either party - Empire Online was changing hands for 124p, while PartyGaming had added 1.5p to 94.5p.

Despite losing much of its £4.6 billion shine at flotation after it cautioned that future growth would not be as spectular as it has been so far, PartyGaming still has a stock market worth of £3.7 billion and is a member of the FTSE 100 index.

Of particular concern to observers of the sector is the ability of online players to hold on to existing customers at a cost per player that is not excessive. The fickle nature of gamblers suggests they are unlikely to develop a loyalty to any one site - instead roaming between a variety of providers in search of the best bets.

Empire Online has insisted that the impact of PartyGaming's ringfencing move is limited to its existing customer base and will have little impact on its ability to sign up new users.

It said last month: "Empire Online is confident that the growth strategies it has in place across its trading platforms, such as Noble Poker and Club Dice, along with growth in new player sign-ups across the Empire Online network, will deliver substantial net profit growth in 2006 (albeit at lower levels than previously expected) and beyond.

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