Nokia is in talks to buy smaller telecom equipment maker Alcatel-Lucent.
A deal would combine the industry's two weakest players but could pose challenges in cutting costs and overcoming political opposition.
In a joint announcement, the Finnish and French companies said they were in "advanced discussions" on a "full combination, which would take the form of a public exchange offer by Nokia for Alcatel-Lucent."
The two, which have been seen as a possible combination for the last several years, cautioned that the discussions could still fall apart.
Shares in Alcatel, a group worth about €11 billion based on Monday's closing share price, rose 16% by this evening. Shares in Nokia, worth about €29 billion, dropped 4.6%.
The pair are a good fit in terms of products and geographies, and bulking up would help them cut costs as they try to catch up with leaders Sweden's Ericsson and China's Huawei.
Nokia would expand its presence in the key US market where Alcatel-Lucent is a major supplier to operators AT&T and Verizon.
But the track record of mergers in the industry is spotty, partly because of the difficulties of cutting costs in a R&D intensive business where companies cannot simply drop products that global telecom operators rely on.
The last round, which gave birth to Alcatel-Lucent and combined Nokia's networks business with Siemens about a decade ago, saw both firms destroy value and lose market share as rivals went on the attack while they were busy integrating the businesses.
The French government may also step in to protect jobs in what is seen as a critical sector for the national economy.
A person at the Economy Ministry said the government wanted more information about the rationale behind the deal and whether it could create a European champion, as well as the impact on French employees.
In May last year, France beefed up its power to block foreign takeovers, extending a 2005 law on defence and other industries to the telecoms sector along with energy, water, transport, and health.
The move came as then economy minister Arnaud Montebourg battled with US conglomerate General Electric over its plans to buy part of engineering group Alstom.
Alcatel-Lucent has around 6,000 employees in France out of a total of 52,000 worldwide. Nokia has almost 62,000 employees.
The joint statement came in reaction to media reports that the two had revived tie-up talks that have been on and off for years in an industry that is seen by investors and sector executives as in need of further consolidation.
A year ago, Nokia sold its struggling handset business to Microsoft.
This week's media reports were focused on the idea that Nokia may buy Alcatel-Lucent's mobile networks arm, which would be a simpler deal to carry out than a full combination but would leave the French firm much smaller.
The combined company would have sales of around €26 billion, compared with €24.4 billion for Ericsson last year and €37.44 billion for Huawei, which also sells handsets so is not an exact comparison.
A counterbid for Alcatel-Lucent is seen by analysts as unlikely since Ericsson would run into competition problems by bulking up further, and Huawei would face strong political opposition in France and the US where Alcatel-Lucent is a major supplier to operators AT&T and Verizon.
