Fiat Chrysler and Peugeot owner PSA are in talks over a potential tie-up that could create a $50 billion giant better placed to tackle a host of costly technological and regulatory challenges facing the global auto industry.
The two groups said in separate statements that they were holding discussions aimed at creating one of the world's leading auto makers.
The statements come after a source familiar with the matter saying yesterday that talks were taking place.
After ditching a proposed merger with Renault in June, Fiat Chrysler (FCA) Chairman John Elkann confirmed the group's bid to pursue an alternative alliance as car makers face huge investments for electrification, emission reduction and autonomous driving technologies.
Milan-listed shares in Fiat Chrysler opened up more the 10% this morning, after ending up more than 7.5% last night in New York. Peugeot share rose more than 6% to hit their highest in more than 11 years.
But if a combination of Peugeot and FCA succeeds in overcoming political, financial and governance hurdles, the new enterprise would still face substantial challenges.
Global automakers face the prospect of a slowdown in demand coinciding with the most dramatic technology changes in a century.
Ttotal volumes of FCA and Peugeot, including China joint venture partners, amounted to 8.7 million vehicles last year.
This would rank the eventual combined group fourth behind Volkswagen, Toyota and the Renault/Nissan Alliance, each at more than 10 million units.
Analysts said they view the combination of these two companies as reasonable given global competition, high capital intensity, and industry disruption from electrified powertrain as well as autonomous technologies.
Investors have speculated for several years that Fiat Chrysler - itself the product of an Italian-US merger - was hunting for a further partner, encouraged by the rhetoric of the company's late chief executive Sergio Marchionne.
FCA, controlled by Exor, the holding company of Italy's Agnelli family, had discussed a combination with Peugeot earlier this year, before it proposed a $35 billion merger with Renault.
At that time, FCA said a deal with Renault offered more advantages than a combination with Peugeot, but Elkann, a scion of the Agnelli family, broke off talks after French government officials intervened and pushed for Renault first to resolve tensions with its Japanese partner Nissan.
Paris has a 12% stake in PSA through state bank BPI, while the Peugeot family and the Chinese government each have a similar holding.
The Chinese presence might trigger doubts in the US over a potential merger, as trade tensions between Washington and Beijing remain high.
Analysts said the combination of FCA and Peugeot had more logic and greater chance of success than the previously attempted FCA-Renault deal, but said PSA offered little synergies in the US, Latin America and China.
PSA's supervisory board is due to meet today to discuss the potential deal, two sources close to the matter said.
FCA said in its statement it had nothing more to add for the time being.