The deal has been agreed to in principle and is expected to be finalized Thursday, according to sources.
Sources said the Suns will also receive the 46th pick in Thursday's NBA draft and $500,000.
The trade gives the Cavs a player they've coveted since February. With center Zydrunas Ilgauskas starting to break down, adding Shaq to the roster gives them a dominant force in the middle.
O'Neal averaged 17.8 points and 8.4 rebounds per game last season and made his 15th All-Star Game.
The Cavs believed O'Neal was the better option because he has just one year left on his contract, and will not eat up cap space that will enable them to pursue players such as Chris Bosh in next summer's star-studded free-agent class.
Chandler, who had injury problems last postseason, has a player option for $12.7 million in 2010-2011 that he is likely to pick up.
The Cavaliers are not done making moves. They still want to re-sign power forward Anderson Varejao and they also would like to add a long, athletic wing player via free agency.
For the Suns, the O'Neal trade is a straight salary dump. Pavlovic's $5 million contract next season is only partially guaranteed, for the amount of $1.5 million.
Factor in the disparities in the contracts among Wallace, Pavlovic and O'Neal, and the team will save $4.5 million next season.
However, factor in the savings the Suns will reap on the luxury tax, and it will be closer to $10 million in savings. That would be amplified if Wallace decides to retire and the Suns buy him out of his contract for less than the $14 million he's owed next season.
The trade is essentially a strong admission by the Suns that the trade of Shawn Marion for O'Neal in February of 2008 was a mistake.
Marion was a free agent this summer and, had they let him walk, their savings would have been $21 million -- not the $5.5 million they're saving in this deal.
When the Suns made the trade, they had the best record in the Western Conference. This year, they finished in the lottery. With O'Neal gone, the question is: Are the Suns finally rebuilding?
They also have the 14th pick in the draft this year, and second-year player Robin Lopez.
Chris Broussard is a senior writer at ESPN The Magazine. NBA reporter Chad Ford contributed to this report.