Fiat Chrysler on Monday proposed a merger with France's Renault to create the world's third-biggest car maker, worth $40 billion, and a possible leader in electric and autonomous cars.
The merged company would reshape the global industry. It would produce about 8.7 million vehicles a year, passing General Motors and trailing Volkswagen and Toyota.
Shares of both companies jumped on news of the offer, which would see each side's shareholders split ownership of the new car maker.
Renault welcomed what it called a friendly offer. The company's board met on Monday at its headquarters outside Paris and said later that it would study the proposal with interest.
It said the merger could "improve Renault's industrial footprint and be a generator of additional value for the alliance" with Japan's Nissan and Mitsubishi.
Fiat Chrysler's offer comes at a key moment for Renault. The French company had wanted to merge fully with Nissan until the arrest in Japan of chairman Carlos Ghosn on charges of financial misconduct.
Now, questions are growing over the Renault-Nissan-Mitsubishi alliance, which together make more passenger cars than any one company.
While Fiat Chrysler says the merger with Renault would accommodate the alliance and lead to savings it, it is unclear how the Japanese companies might react in the longer term to being tied to a much larger partner.
A deal would save €5 billion (Dh20.56bn) for the merged companies each year by sharing research, purchasing costs and other activities, Fiat Chrysler said.
It promised the deal would involve no plant closures but did not address possible job cuts.
The companies are largely complementary. Fiat Chrysler is stronger in the US and SUV markets, while Renault is prominent in Europe and in developing electric vehicles. Together, they would be worth almost €37bn.
Shareholders of Fiat Chrysler, which includes the holding company of the founding Agnelli family with a 29 per cent stake, would receive a €2.5bn special dividend to make up for an imbalance in company values.
"This operation will bring benefits to both countries," Fiat Chrysler chairman John Elkann said in Italy.
Mr Elkann said it had been 10 years since Fiat's takeover of bankrupt Chrysler, in exchange for small-car technology and management expertise.
The car market has since shifted dramatically, with Fiat Chrysler abandoning small cars in the US in favour of SUVs.
Analysts at financial firm Jefferies said it was "hard to disagree with the logic" of the deal, because there was a strong fit in the markets each company covers and the brands they offer.
"The elephant in the room is who will run the entity," analysts Philippe Houchois and Himanshu Agarwal wrote in a note to investors.
Mergers of equals can be difficult to manage over questions of who gets the top leadership positions and which brands are promoted and receive most investment.
A tie-up between Daimler and Chrysler in the 1990s was billed as a merger of equals, but it eventually collapsed amid cultural differences and recriminations.
But investors were enthusiastic about Fiat Chrysler's plan, pushing the company's shares up 8 per cent and Renault's 12 per cent.
The French government, which owns 15 per cent of Renault, said it was "favourable" to the idea of a merger but wanted to study the conditions more carefully, government spokeswoman Sibeth Ndiaye said.
Ms Ndiaye said of particular concern was Renault's industrial development and employees' working conditions.
"We need giants to be built in Europe," she said.
Mr Ghosn's legal problems have left Renault vulnerable.
Ferdinand Dudenhoeffer, head of the Car research centre at Duisburg-Essen University, said his plans to merge Renault with Nissan-Mitsubishi had "little appeal" for the Japanese.
Mr Dudenhoeffer said Renault's sales represented just 36 per cent of 2018 alliance sales, and the Japanese did not want to see the French car maker drive a merger with those numbers.
But a Renault merger with Fiat Chrysler could strengthen both companies' positions and put pressure on smaller companies such as Ford in Europe.
Collaboration between car makers has taken on greater importance in recent years as they build their technology for electrical vehicles, internet connectivity and artificial intelligence for vehicles.
Car makers are also under pressure from regulators, particularly in Europe and China, to produce electric vehicles so they can meet tougher climate change regulations and after scandals over false statements about the amount of pollutants their engines emit.
The merger idea is the biggest corporate move so far by Fiat Chrysler chief executive Mike Manley, who took the position after the unexpected death last year of charismatic leader Sergio Marchionne.
What happens to jobs is likely to be a source of concern. France's influential CGT union warned against cuts and said it wanted the French government to retain a blocking stake in any new company.
Matteo Salvini, the leader of Italy's right-wing populist League party and the Deputy Premier, said that "if Fiat grows, it is good news for Italy and Italians", although he warned that a deal should protect "every single job".
In Tokyo, Nissan chief executive Hiroto Saikawa would not comment directly on the merger idea but said: "I am always open to exchanging constructive views on strengthening the alliance."