AT&T Inc. and the U.S. Department of Justice are discussing potential conditions as part of winning government approval of the U.S. No. 2 wireless carrier's $85.4 billion acquisition of Time Warner Inc., according to sources familiar with the situation.

“Vertical mergers like this one are routinely approved because they benefit consumers without removing any competitor from the market, said an AT&T spokesman. "While we won't comment on our discussions with DOJ, we can say that this transaction should be no exception.”

The Justice Department did not immediately respond to a request for comment.

The Wall Street Journal reported earlier on Thursday that the Justice Department was considering suing to block the deal and the two sides were not close to an agreement.

Shares of Time Warner were down 4 percent at $94.45, while AT&T's shares were slightly lower.

AT&T has previously said the deal is expected to close by the end of the year.