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A corporation source said Ruth Kelly, the secretary of state at the communities department, had approved the merger in principle and although the Treasury still had queries they were not fundamental.

ºÚ¶´ÉçÇø understands that an announcement of the merger has been pencilled in for 20 November.

It is understood that McCarthy, who is a senior director of the DCLG, is likely to move to the new post within months. He is presently chairing the joint EP/corporation board that is managing the merger. It held its first meeting last week.

Communities England would take over many of McCarthy’s responsibilities at the DCLG, leaving a slimmed-down unit at the department for setting policy.

Althought the top job at Communities England will have to be advertised, a senior corporation source said Jon Rouse, the housing quango’s chief executive, has been told that he will not be getting it.

If McCarthy were appointed, it would discourage the perception that one of the partners has taken over the other.

McCarthy has been instrumental to the merger since the review was announced by David Miliband in the spring. He is also close to Baroness Ford, EP’s chairman, and is a former chief executive of the Peabody Trust and chairman of the National Housing Federation.

Communities England would take over the DCLG’s responsibilities for programmes such as stock transfer, arm’s length management organisations, housing market renewal, the Thames Gateway and neighbourhood renewal.

It would take between nine and 18 months to set up because of the need to secure parliamentary approval for winding up the corporation and EP, as they are both statutory bodies.