PSA Group, the French owner of Peugeot, is exploring a merger with its US-Italian rival Fiat Chrysler, it has confirmed.
A deal between the two carmakers would create a business with a combined market value of nearly $50bn (£39.9bn).
This is Fiat Chrysler’s second attempt at a merger this year after it pulled out of an agreement with Renault in June.
Fiat Chrysler shares jumped more than 9% in trading on Wednesday.
The potential merger would face significant political and financial hurdles.
Discussions remain in the early stages and there is no guarantee of a final deal.
However, if the two companies do combine, PSA chief executive Carlos Tavares is expected to lead the enlarged group.
John Elkann, Fiat Chrysler’s chairman and the head of Italy’s Agnelli industrial dynasty, which controls the business, would retain the same position at the new company.
The talks come months after a proposed tie-up between Fiat Chrysler and French carmaker Renault collapsed with Renault in June.
Mr Elkann broke off talks after French government officials intervened and pushed for Renault first to resolve tensions with its Japanese partner Nissan.
- Fiat Chrysler withdraws bid for Renault
After ditching the proposed merger Mr Elkann confirmed the group’s bid to pursue an alternative deal.
Car makers face huge investments for electrification, emission reduction and autonomous driving technologies, which gives them an incentive to merge.
A merger of the two groups would create one of the world biggest car makers, and bring a number of brands under one roof including Alfa Romeo, Citroen, Jeep, Opel, Peugeot and Vauxhall.
Morningstar senior equity analyst Richard Hilgert said that the total sales of Fiat Chrysler and Peugeot, including China joint venture partners, were 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.
“We 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, Mr Hilgert said.
Fiat Chrysler had described its bid for Renault as a “transformative” proposal that would create a global automotive leader.