The move will also give GDF, Europe's second-biggest utility, a greater presence in the United States, Middle East and Asia, as well as give it access to the UK and Australia.
GDF will put its GDF Suez Energy International unit into International Power and will then hold a 70 per cent stake in the new company, the companies said in a joint statement.
International Power shareholders will receive a special dividend of 92 pence per share, totalling £1.4bn, in exchange for relinquishing control of the company.
The combined company, which will retain its London listing, will have generating capacity of over 66 gigawatts (GW) and revenues of 84 billion euros (£70bn).
International Power Chief Executive Philip Cox and Financial Director Mark Williamson will retain those positions at the new company.
The two companies had entered abortive talks at the start of this year, but revived them last month.
The announcement came as the two reported first-half results.
GDF, Europe's second biggest utility, reported a forecast-beating rise in operating profit to 8.2bn euros, boosted by a cold winter that pushed power consumption higher, and stuck to its targets for this year and next.
International Power posted profit from operations of £524m, down from £555m last year and compared with a forecast of 500 million, according to a poll of four analysts supplied by the company.
The British company is being advised by JP Morgan Cazenove, Morgan Stanley and Nomura, while GDF's advisers are NM Rothschild and Goldman Sachs.