By Ludwig Burger and Greg Roumeliotis

(Reuters) - German pharmaceutical and crops manufacturer Bayer AG <BAYGn.DE> said on Monday that its negotiations with Monsanto Co <MON.N> had advanced, and it was now willing to offer more than $65 billion to acquire the world's largest seed company.

Bayer's announcement came as the gap in price expectations between the two companies has narrowed significantly, although important terms, including potential divestitures in case of antitrust scrutiny, have yet to be agreed on.

Bayer in a statement said that it was prepared to offer $127.50 per share in connection with a negotiated deal, up from its previous offer of $125 per share. The Bayer statement confirmed a report by German daily Rheinische Post earlier on Monday.

Rheinische Post also reported, citing sources which it did not identify, that an offer of $130 per share may be necessary to clinch a deal with Monsanto "in a swift and friendly way."

Bayer's bid was already the largest all-cash proposed takeover on record. A deal with Monsanto would give the German company a shot at grabbing the top spot in the fast-consolidating farm supplies industry.

ChemChina agreed earlier this year to buy Switzerland's Syngenta <SYNN.S> for $43 billion, after the latter rejected takeover approaches from Monsanto. Dow Chemical Co <DOW.N> and DuPont <DD.N> are forging a $130 billion merger, which is to be followed by a break-up into three businesses.

In July, Bayer raised its earlier offer of $122 per share to $125 to put Monsanto under pressure to engage further.

Monsanto subsequently turned down Bayer's $125 a share offer, but said it was open to further talks with the German company, as well as other parties.

Reuters reported last month that Monsanto's talks with Bayer were making progress, with the latter receiving some limited access to Bayer's books.

Since then, negotiations have advanced further, with more information exchanged between the two sides and the chief executives of the two companies engaging in direct discussions, according to people familiar with the matter, who asked not to be identified because of the confidentiality of the talks.

However, while the two companies are close to reaching an agreement on price, they have yet to agree on a strategy on how to jointly tackle potential antitrust challenges, the people said.

(Reporting by Ludwig Burger in Frankfurt and Greg Roumeliotis in New York; Additional reporting by Gayathree Ganesan in Bengaluru; Editing by Tom Brown and Leslie Adler)