LAS VEGAS (AP) -Harrah’s Entertainment Inc. agreed to buy Caesars Entertainment Inc. for more than $5 billion in a deal that would create the world’s largest gambling company, a source familiar with the talks told The Associated Press.

The boards of the two Las Vegas-based companies agreed in principle to the deal, a source familiar with the negotiations said Wednesday night. But the companies had some issues that remain unresolved, the source said.

The source said Harrah’s would buy Caesars for about $17 per share or more than $5 billion. The deal includes stock and cash, plus the assumption of Caesars’ debt, the source said.

Harrah’s has partnered with the Narragansett Indian Tribe to build a casino in West Warwick, R.I. The proposal is subject to voter approval. The state Legislature is expected to convene this month to try to override Gov. Don Carcieri’s veto of a measure that would call a referendum in November.

The companies were expected to announce the agreement early Thursday.

Executives with both companies did not return several calls late Wednesday.

The source said Harrah’s and Caesars began negotiating after MGM Mirage completed a deal last month to buy Mandalay Resort Group for $4.8 billion in cash. That deal – plus the newer, larger combination – will face intense scrutiny from federal and state gambling regulators.

News of the possible buyout sent Caesars shares up nearly 15 percent Wednesday, while Harrah’s stock slipped.

Harrah’s Entertainment, which operates heavily with riverboat casinos, has 26 casinos in 13 states under the Harrah’s and Showboat names. It has about 41,000 employees.

Harrah’s recently completed its $1.45 billion merger with Horseshoe Gaming Holding Corp. The Horseshoe casinos are in Bossier City, La., Tunica, Miss. and Hammond, Ind. The Horseshoe merger made Harrah’s – for the time being – the largest casino company in the world.

To appease regulators, Harrah’s sold its Shreveport, La., casino to Boyd Gaming Corp. for $190 million. It also owns and operates Harrah’s Louisiana Downs in Bossier Parish, La.

Caesars, which changed its name in January from Park Place Entertainment Corp., had been the world’s largest casino operator before the Horseshoe deal was completed. A MGM Mirage-Mandalay combination would eclipse either of the individual companies but fall short of the merged Harrah’s-Caesars company.

Caesars recently has emerged from a turbulent period, which saw its stock dip below $7 and its chief executive leave in 2002. Thomas E. Gallagher, who is running for Congress in Nevada, was replaced by Wally Barr.

Barr has been credited for helping the company stabilize its finances and revive its foundering stock price.

Under Barr’s leadership, Caesars Entertainment sold the aging Las Vegas Hilton and is using the money to pay down debt. The company has invested millions into revamping Caesars Palace, its signature property on the Las Vegas Strip.

Caesars has 27 properties in five countries on four continents, including Caesars Palace and Bally’s Las Vegas, and employs 54,000. The company led the industry with $4.17 billion in 2003 revenue, slightly ahead of Harrah’s $4.13 billion. MGM Mirage revenues totaled $3.91 billion, while Mandalay reported $2.49 billion.

Merrill Lynch gambling analyst David Anders said in an investor’s note that the deal makes sense because Harrah’s wants to increase its presence on the Strip.

“Harrah’s has made it clear that they were seeking to build a high-end property on the Las Vegas Strip by 2008,” Anders wrote. “This would obviously enable them to compete immediately.”

Shares of Caesars rose $2.08, or 14.9 percent, to close at $16 Wednesday on the New York Stock Exchange. Harrah’s shares fell $1, or about 1.9 percent, to close at $50.98.

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On the Net:

Harrah’s Entertainment: http://www.harrahs.com

Caesars Entertainment: http://www.caesars.com

AP-ES-07-14-04 2310EDT