(Reuters) - British insurer Direct Line said on Friday it was set to recommend a sweetened 3.61 billion pound ($4.60 billion) cash-and-stock takeover by Aviva, if the bigger rival makes a formal offer.

The new proposal valued Direct Line at 275 pence per share, compared with a 250-pence cash and share bid that was rejected last week.

The companies in a joint statement on Friday said they have reached a preliminary agreement on the financial terms of a potential acquisition.

According to British takeover rules, Aviva has until Dec. 25 to make a firm offer or walk away.

($1 = 0.7850 pounds)

(Reporting by Aby Jose Koilparambil and Yadarisa Shabong in Bengaluru; Editing by Rashmi Aich)