Car manufacturer Fiat Chrysler has confirmed “ongoing discussions” are taking place with Peugeot and Vauxhall owner PSA over a potential merger.
The tie-up could create a $50bn (£40bn) company if the automotive behemoths pull it off.
Fiat Chrysler had abandoned an earlier attempt to merge with French car manufacturer Renault earlier this year.
But PSA said the talks could lead to “creating one of the world’s leading automotive groups”.
The merger discussions come as the car manufacturing sector faces a huge sales slowdown due to a variety of factors such as Brexit uncertainty and global trade wars.
US tariffs have severely dampened Chinese demand for cars.
At the same time the industry is investing large sums of money to introduce electric vehicles.
Fiat Chrysler’s share price leapt 7.5 per cent on Wall Street. But the tie-up would face political and financial hurdles.
PSA chief executive Carlos Tavares is tipped to lead the merged companies if they do combine. And Fiat Chrysler chairman John Elkann would keep his position in the new firm.
The merger would bring huge brands including Alfa Romeo, Vauxhall, Peugeot, Citroen, Jeep and Opel together under one roof.
PSA has mooted plans to build its nextVauxhalll Astra model in the UK at Ellesmere Port, but warned that depends on the nature or existence of a Brexit deal.
Fiat Chrysler had described its bid for French rival Renault as “transformational” over summer.
But it pulled out in early June after Renault board members failed to agree on the offer. Renault had said the French government had asked for a postponement on the decision.
New UK car sales edged up in September after a terrible year that had not seen a rise in sales since February.