The merged company would have combined sales of nearly 170 billion euros per year and 11 billion euros of operating profits, the carmakers said.
The Dutch-based parent company would have balanced representation and a majority of independent directors with FCA's John Elkann as chairman and PSA's Carlos Tavares as CEO and member of the board.
The boards of both carmakers "both share the conviction that there is compelling logic for a bold and decisive move that would create an industry leader with the scale, capabilities and resources to capture successfully the opportunities and manage effectively the challenges of the new era in mobility," said the statement.
A merger would create significant savings as both firms share the costs of developing electric vehicles that are expected to dominate personal transportation in the future as the world strives to reduce carbon emissions to limit climate change.
"The significant value accretion resulting from the transaction is estimated to be approximately 3.7 billion euros in annual run-rate synergies derived principally from a more efficient allocation of resources for large-scale investments in vehicle platforms, powertrain and technology and from the enhanced purchasing capability inherent in the combined group's new scale," it said.
"These synergy estimates are not based on any plant closures," it added.
France, which owns a stake in PSA and earlier this year opposed a mooted tie-up between Renault and Fiat Chrysler, signalled it favours the project.
French Economy Minister Bruno Le Maire "favourably greets the entry into negotiations" of the two carmakers, said a statement from his office.
However, it warned the French government "will remain particularly vigilant on the industrial footprint in France, where decision making will be located and promises by the new group to create in Europe the infrastructure to build electric batteries" needed for the shift to new vehicles.
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