LAS VEGAS (AP) – Harrah’s Entertainment Inc. is buying Caesars Entertainment Inc. (CZR) for about $5.2 billion in cash and stock in a deal that would create the largest gambling company in the world.

The deal announced Thursday eclipses last month’s high-profile MGM Mirage merger with Mandalay Resort Group (MBG) while setting up a battle for customers on the lucrative Las Vegas Strip.

A source familiar with the deal, speaking on condition of anonymity, said Harrah’s and Caesars began negotiating after MGM Mirage completed its deal last month to buy Mandalay for $4.8 billion in cash.

Both deals will face intense scrutiny from federal and state gambling regulators.

Under terms of the deal announced Thursday, Harrah’s will pay $1.8 billion in cash and exchange about $3.4 billion in Harrah’s stock for all of the shares of its Las Vegas-based rival.

That values Caesars’ common stock at about $16.96 a share, a 6 percent premium over its closing price of $16 on Wednesday.

Harrah’s also will assume about $4.2 billion in Caesars Entertainment debt in the deal.

The deal has been approved by the boards of both companies but is subject to approval by shareholders and regulators.

Harrah’s Entertainment, which operates heavily with riverboat casinos, has 28 casinos in 13 states under the Harrah’s and Showboat names. It has about 41,000 employees.

Caesars has 28 properties worldwide, including Caesars Palace and Bally’s Las Vegas, and employs 54,000.

“This acquisition will solidify Harrah’s position as the pre-eminent distributor of casino entertainment,” said Gary Loveman, Harrah’s Entertainment president and chief executive.

Stephen Bollenbach, Caesars Entertainment chairman, said it was “an outstanding transaction for both parties.”

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. (BYD) 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 surpass 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 from Nevada, was replaced by Wally Barr.

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 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.