Investors cheered the prospect, with Renault's shares soaring 15 percent in midday trading in Paris, and Fiat Chrysler stock up more than 10 percent in Milan.

The tie-up would forge the world's third-largest automaker, giving Fiat access in particular to Renault's electric car technologies.

Renault, for its part, could get access to Fiat Chrysler's extensive US operations, and its expertise in trucks and SUVs.

The idea has the backing of the French government, which owns a 15 percent stake in Renault, after Fiat said the merger would not result in the closure of any production sites.

"The government is in favour... but the terms of this merger must be supportive of Renault's economic development, and obviously of Renault's employees," government spokeswoman Sibeth Ndiaye said Monday.

"We have very large companies, giants, that are being created outside of Europe, and today we needs giants to be created in Europe," she told BFM television, adding that Finance Minister Bruno Le Maire had been informed of the talks by Renault board chairman Jean-Dominique Senard last week.

France's CGT labour union, the second-largest at Renault, called on the government to maintain a blocking minority after any deal, which could see the state's stake diluted in a merger.

  

'Pre-eminent global group'

Renault was plunged into disarray last November with the arrest in Tokyo of Ghosn, who was also chairman of its Japanese partner Nissan.

That alliance, which also includes Mitsubishi, sells around 10.8 million automobiles per year in total, compared with Germany's Volkswagen and Japan's Toyota, both with around 10.6 million.

But its future is in doubt following Ghosn's ouster at both Renault and Nissan, with Tokyo in particular bristling over a push by the French side for deeper integration.

Renault holds 43 percent in Nissan, which in turn owns 15 percent of its French partner. Despite pledges on both sides to pursue the alliance, analysts say the tensions might be pushing Renault to explore alternatives.

Fiat Chrysler said its proposal for Renault would create "a pre-eminent global automotive group" with annual sales of 8.7 million vehicles.

The brand portfolio of the two groups would be "broad and complementary...

and would provide full market coverage, from luxury to mainstream", it said.

The combination would be carried out as a merger transaction under a Dutch parent company, with shares in the new group listed in Paris, Milan and New York.

Fiat Chrysler has been under pressure in Europe, stoking speculation it was looking for a partner as the industry is pushed to consolidate in the face of declining demand and a costly switch into electric cars.

  

Electric and self-driving cars

Fiat Chrysler is widely seen as a latecomer to the electric vehicle market but does well in the US SUV and pick-up sectors.

Renault meanwhile has pushed ahead in electric cars but is relatively weak in North America, so the two companies would seem a good fit.

Fiat Chrysler said the merger would put the group in "a strong position in transforming technologies, including electrification and autonomous driving."

Early this year, rumours circulated that Renault was interested in Fiat-Chrysler after its hopes for a full merger with Nissan or even French competitor PSA were dashed.

Fiat Chrysler predicted that the merger would generate more than five billion euros ($5.6 billion) of cost-savings and other synergies, on top of the benefits from the Renault-Nissan-Mitsubishi alliance.

All counted, including Nissan and Mitsubishi, a combination with Fiat Chrysler would mean the production of close to 16 million vehicles, besting Volkswagen and Toyota. (AFP)