GOOGLE Inc and Verizon Communications Inc are close to finalizing a proposal for so-called "network neutrality" rules, which would dictate how broadband providers treat Internet traffic flowing over their lines, according to an insider.

Any deal that is reached could form the basis for federal legislation and would likely shape efforts by the Federal Communications Commission to broker an agreement on the contentious issue, which has pitted America's big phone and cable companies against many big Internet companies.

The FCC has been holding talks with a handful of large phone, cable and Internet companies - including Verizon and Google - to try to reach some sort of industrywide compromise on net neutrality that all sides can accept. FCC Chairman Julius Genachowski is seeking to adopt rules that would require phone and cable companies to give equal treatment to all broadband traffic traveling over their networks.

Public interest groups and a number of big Internet companies, including Google and online calling service Skype, say such rules are needed to prevent broadband providers from becoming online gatekeepers. They are concerned that phone and cable companies could start charging extra for priority access, or slow or even block Internet phone calls, online video and other web services that compete with their core businesses.