Reading have turned to the former Royals boss to replace Steve Clarke who was axed last week 24 hours after the home defeat to Queens Park Rangers.
McDermott has a long-running association with Reading having worked there for 13 years as scout up to manager and leading the club to the Premier League.
The 54-year-old was sacked by Reading in March 2013 after a poor run of form and he later went on to become Leeds United manager.
However, after an eventful spell in charge at Elland Road, McDermott left Leeds in May 2014 and since then he has been working at former club Arsenal in a scouting capacity.
McDermott has been keen to get back into management and the chance to return to Madejski Stadium has ben enough to convince him to return to the managerial hotseat.
McDermott and his agent are understood to have held positive talks with Reading officials on Tuesday and he is expected to be confirmed as the club’s manager for the second time in the next 24 hours.