The stock jumped 24% to 168.3p, while shares in GVC were up 4.8% at 952.5p on the news.
GVC has offered to pay up to £3.9 billion, or 203.7p per share, for the business. Under the deal, GVC shareholders would own 53.5% of the combined group, and Ladbrokes Coral shareholders 46.5%.
The deal would be the latest in a flurry of takeovers in the gambling sector. Last year GVC bought Btwin.party, while Ladbrokes and Coral merged.
The move comes as gambling groups face tougher regulation, with the government set to crack down on fixed odds betting terminals (FOBTs). Current rules limit maximum stakes on these machines to £100, but this could be slashed to as low as £2.
While a GVC takeover of Ladbrokes Coral has long been rumoured, the timing of the deal, before the new rules on FOBTs are announced, took some by surprise.
However, GVC has hedged against punitive rules, with the price it will pay for the business falling to £3.1 billion, or 160.9p per share, should the limit be slased to £2.
'GVC coming in before knowing the outcome of the all-important government review into the industry was probably an outside bet,' said George Salmon, equity analyst at Hargreaves Lansdown, pointing to the 'significant chunk' of Ladbrokes Coral revenues from FOBTs.
But he said that GVC's pricing hedge 'makes sense', as did the strategic rationale for the deal.
'GVC should get plenty of cost savings, while the combination would bump up its exposure to some of the world's largest regulated online gaming markets, including the UK, Italy and Australia.'
Shares in Playtech (PTEC), the gambling software provider with a tie-up to Labrokes Coral, slumped 6.1% to 794.5p on the news.
'At this stage we are uncertain over the potential impact on one of its most important licensees although note its stake in Ladbrokes Coral is worth approaching 80p per share,' said Greg Johnson, analyst at Shore Capital.
The FTSE 100 meanwhile rose 17 points, or 0.2%, to 7,365. Among 'small-cap' stocks, HSS Hire (HSS) surged 13.3% to 33p after announcing additional cost savings.