The fine, to be imposed by the United States and Britain, would be the latest blow to UBS after a $2.3-billion rogue trading loss in London last year, a $780-million fine after a U.S. tax investigation in 2009 and its near collapse in 2008 under the weight of losses on U.S. sub-prime mortgage lending.
UBS will admit that roughly 36 of its traders around the globe manipulated yen Libor between 2005 and 2010, according to the source, with a final deal not expected before Wednesday.
The source said settlement talks are now centring on a fine in the region of $1.5 billion - somewhat higher than source were predicting last week and three times the $450 million levied on British bank Barclays Plc in June for similar manipulation of benchmark interest rates.
The fine against UBS, whose spokesman declined comment, would be the second-largest ever levied against a bank for wrongdoing, after Britain's HSBC last week agreed to pay $1.92 billion to settle a probe in the United States into laundering money for drug cartels.
The stiff penalty would, however, have only a limited financial impact on UBS. It earned 4.233 billion Swiss francs in net profit last year and the bank has spent much of this year and last bolstering its capital.
UBS shares, which hit their highest level in 18 months last week at 15.29 francs, were last down 0.8 percent at 14.92 francs, in line with a drop in the wider European bank index.
Paying $1.5 billion to settle the Libor probe would shave 50 basis points off UBS's capital ratios, Kepler Capital Markets analyst Dirk Becker estimated: "Even after the fine, UBS would still be better capitalised than other banks."
UBS is also benefiting from its decision in October to withdraw from riskier areas of fixed income activities which soak up large amounts of capital.
In doing so, UBS is slashing risky assets more aggressively than rivals such as Credit Suisse and Germany's Deutsche Bank . That in turn bolsters capital ratios.
UBS's common equity Tier 1 ratio stood at 9.3 percent at the end of the third quarter, when factoring in global Basel III standards which take full effect in 2019, meaning it is well on its way to fulfilling those as well as stricter Swiss rules.
That compares to the 8.5 percent pro forma capital that Credit Suisse estimates it will hit by year-end, or Deutsche's 7.2 percent estimate.
The potential for political fallout against UBS is tougher to judge, however.
While Barclays' settlement touched off a firestorm in Britain that forced its chairman and chief executive to quit, previous scandals at UBS have already culled the ranks of top bosses, ash has the decision to wind down parts of the investment bank that have tarnished the bank's name.
Swiss commentators suggested the Libor affair would stiffen the resolve of UBS's top management - all installed after the period under investigation - to focus on the core business of wealth management as they trim risky trading activities.
However, the settlement could add to global public and political anger about standards and culture across the industry.
The settlement will be with U.S., British and Swiss regulators, although the last has no power to fine the bank. Japanese regulators are also involved, some sources said, although it was not clear if they would be formally involved in the penalties.
UBS will admit to criminal wrongdoing by its Japanese arm, where one of its traders manipulated yen Libor and euro yen contracts, sources familiar with the matter have told Reuters.
Admitting to criminal wrongdoing can be fatal for a bank, as it can lose its licence. But by admitting to wrongdoing only at its Japanese subsidiary, where UBS employs 1,000 staff, it effectively ring-fences the damage, sparing its bigger units.
Individuals are also being targeted. The UBS investigation centres on former UBS trader Thomas Hayes, but also includes other UBS bankers, the sources said.
Hayes, who joined Citigroup after leaving UBS in 2009, is one of three British men arrested last week by London police but later released on bail, according to a source. Reuters has been unable to contact Hayes.
More than a dozen banks have been caught in the international inquiry into Libor rates, with most of the focus being on how rates were set between 2005 and 2008.
Royal Bank of Scotland is also expected to shortly reach a settlement on Libor manipulation. The bank will receive a penalty of more than 350 million pounds, the Sunday Times newspaper reported, without citing sources. RBS declined to comment.
Libor benchmarks are used to help price trillions of dollars worth of loans around the world, ranging from home loans and credit cards to complex derivatives.
Tiny shifts in the rates, compiled from daily polls of bankers, could benefit any given bank by millions of dollars. But every dollar a bank benefits could mean an equal loss by another bank, hedge fund or investor on the other side of the trade - raising the threat of a raft of civil lawsuits.
Barclays in June admitted it improperly took its own trading positions into account when reporting interest rates used to calculate the Libor benchmark.
Reuters' parent company Thomson Reuters Corp collects information from banks and uses it to calculate Libor rates according to specifications drawn up by the British Bankers Association (BBA).