The merger would bring FCA's brands such as Jeep, Chrysler, Alfa Romeo and Fiat under a common umbrella with Renault Group's Renault, Dacia and Lada brands.
The merged company would rank third in the global auto industry behind Toyota and Volkswagen.
Analysts warned of big complications, including Renault's existing alliance with Nissan, the French state's role as Renault's largest shareholder and potential opposition from politicians and workers to any cutbacks.
"The market will be careful with these synergy numbers as much has been promised before and there isn’t a single merger of equals that has ever succeeded in autos," Evercore ISI analyst Arndt Ellinghorst said.
The deal could take more than a year to finalize, FCA CEO Mike Manley told employees on Monday in a letter.
The transaction will be structured as a 50-50 ownership through a Dutch holding company, FCA said, adding that it would give Renault investors an implied premium of about 10 percent. After payment of a 2.5 billion-euro special dividend to FCA shareholders, each group would receive 50 percent of the combined entity in new stock.
Exor, the holding company of Fiat's founding Agnelli family, is set to become the single largest shareholder in the combined entity. The new company would be chaired by John Elkann, head of the Agnelli family that controls 29 percent of FCA, sources familiar with the deal talks told Reuters. Renault Chairman Jean-Dominique Senard would likely become CEO, one source said.
Renault and FCA had a combined market value of 32.6 billion euros as of Friday. Milan-listed Fiat Chrysler shares jumped 19 percent in early trade, while Renault stock leapt 17 percent.
Renault and FCA built about 8.7 million cars last year, which would vault the pair past Hyundai Motor and General Motors. That’s still behind the world’s two biggest automakers, Volkswagen Group and Toyota, which both topped 10 million vehicles last year. Renault’s existing alliance, including numbers from partners Nissan and Mitsubishi, also reached this milestone.
The merger would give Renault access to the North American market, while FCA would gain clout in Russia, the French carmaker’s second-biggest market with its AvtoVAZ unit, which builds Ladas. FCA has a highly profitable businesses in North America with its RAM trucks and Jeep brand, but lost money last quarter in Europe, where most of its plants are running below 50 percent capacity and it faces a struggle with new emissions curbs.
A deal would do little to address both automakers' limited presence in China, the world's biggest auto market.
The merger plan faces political and workforce hurdles in Italy, and potentially also in France. FCA said the planned cost savings would not depend on factory closures.
Industry bankers said most of the savings were likely to come from procurement, and FCA in particular would benefit from Renault's work on electric and self-driving vehicles where it had done little itself. However, they were skeptical the companies could avoid job losses in Europe.
One source familiar with the matter said FCA had proposed to guarantee industrial jobs and existing sites, leaving scope for white-collar and engineering layoffs as well as some plant downsizing.
Pressure for consolidation among automakers has grown with the challenges posed by electrification, tightening emissions regulations and expensive new technologies being developed for connected and autonomous vehicles.
If successful, the tie-up could have profound repercussions for Renault's 20-year-old alliance with Nissan, already weakened by the crisis surrounding the arrest and ouster of former Chairman Carlos Ghosn late last year.
FCA and Renault have moved ahead without Nissan, the French automaker’s 20-year partner, which has resisted proposals by Renault to merge in a holding-company structure.