The French carmaker Renault has said it would study "with interest" a 50-50 merger proposal from Fiat Chrysler.
The deal could reshape the industry as Renault reviews its options following the arrest in Japan last November of its chief executive.
Renault had for years tied its strategy to its partnership with the Japanese manufacturers Nissan but this is being challenged after the ouster of Carlos Ghosn at both companies.
After a board meeting on Monday over what it termed a "friendly" offer, Renault said it would enter talks on the new proposed merger that would create additional value while widening its manufacturing output.
Investors welcomed 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 proposed tie-up with Fiat 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.
French government broadly backs merger
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 on 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 the French television station BFM, adding that Finance Minister Bruno Le Maire had been informed of the talks by Renault board chairman Jean-Dominique Senard last week.
Meanwhile 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.