Toshiba Corp and business partner Western Digital Corp have agreed in principle to settle a dispute over the embattled Japanese conglomerate`s plans to sell its $18 billion chip unit, sources with direct knowledge of the talks said.

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Toshiba`s board has approved a framework for a settlement and is aiming to reach a final agreement by next week, one of the sources said.

The potential for Western Digital - Toshiba`s partner in its main semiconductor plant and jilted suitor in the long and contentious auction of the unit - to block a deal has been seen as the main obstacle to the planned sale to a consortium led by Bain Capital LP.

The settlement under discussion calls for Western Digital to drop arbitration claims seeking to stop the sale in exchange for allowing it to invest in a new production line for advanced flash memory chips that is slated to start next year, two sources said.

The sources declined to identified as they were not authorised to speak to the media.

A Toshiba spokesman said that while the company was open to a settlement, it would not disclose discussion specifics or details of board of directors meetings. "It is not a fact that we have reached an agreement with Western Digital," he said.

Western Digital declined to comment.

Toshiba was forced to put the unit - the world`s no. 2 producer of NAND chips - on the block to cover billions of dollars in liabilities arising from its now bankrupt U.S. nuclear power unit Westinghouse.

The deal with the Bain-led consortium will, however, see it reinvest in the unit and together with Hoya Corp, a maker of parts for chip devices, Japanese firms will hold more than 50 percent of the business - a keen wish of the Japanese government.