Cadbury shares rose after the two companies said in a joint statement: "The boards of Kraft Foods and Cadbury confirm that they are finalising the terms of a recommended offer for Cadbury. A further announcement will be made shortly."
The Cadbury board was expected to advise shareholders to accept a new offer of 840 pence a share - valuing the company at 11.5 billion pounds ($18.9bn) - after rejecting a previous offer of 761p (10.5bn pounds) as "derisory".
Cadbury employees spoke of uncertainty over the fate of the company’s 5,600 workers in Britain and nearly 40,000 abroad, and a descendant of its founder described the takeover as a “horror story”.
"Every single iconic brand is going - we sell out everything," Felicity Loudon, great granddaughter of founder George Cadbury, told the BBC.
"For us to sell out to a company that doesn't bear any resemblance to us at all is a horror story."
Britain’s second most powerful politician, business minister Peter Mandelson opposed the takeover, warning Kraft last month: “If you think that you can come here and make a fast buck you will find that you face huge opposition from the local population... and from the British government.”
Britain’s largest trade union Unite, which launched a ‘Keep Cadbury Independent’ campaign last month, has warned that Kraft plans at least 30,000 job cuts worldwide.
It says that while Kraft shed 19,000 jobs and closed down 35 sites to pay off an estimated debt of $22bn from 2004-08, Cadbury has grown by six percent year on year for the past four years, posted a 30 percent increase in pre-tax profits and deepened its commitment to ethical trading.
The British government and unions have watched helplessly as a series of struggling British manufacturing companies have been snapped up by foreign companies in recent years.
They include such iconic and household names as the shipping company P&O, building society Abbey National, airport owner-operators BAA, carmakers Jaguar Land Rover and steelmaker Corus - both now owned by India’s Tata Group, glass manufacturer Pilkington, and a clutch of electricity and water companies.
However, Kraft’s hostile takeover bid going directly to shareholders over the heads of the Cadbury board has aroused very strong feelings, particularly in the city of its birth Birmingham - a manufacturing belt that tends to support the ruling Labour party.
Cadbury was founded in 1824 when John Cadbury, a Quaker, opened a shop in Birmingham selling tea, coffee, hops, mustard and a new sideline - cocoa and drinking chocolate - as an alternative to alcohol.
It operates in more than 60 countries and made profits of 638 million pounds in 2008.
A second bidder, American confectioner Hershey, has until the weekend to table an offer, but few believe it can match Kraft, which is five times its size.
The EU's competition watchdogs are expected to order Cadbury to sell part of its chocolate business in Eastern Europe if the merger goes through.
Kraft and Cadbury's joint sales would amount to some $72 billion, closing up to world market leader, Switzerland's Nestle SA.
Nestle is taking over Kraft's frozen pizza unit, which the US company sold to be able to finance the Cadbury deal.
However, the deal comes with risks for Kraft, which is facing resistance from stakeholders, including Warren Buffet's Berkshire Hathaway, the company's largest shareholder, who worry that Kraft is paying too much for Cadbury.