European share markets rose overnight as investors snapped up auto stocks following confirmation of merger talks between car giants Fiat Chrysler and Renault.

Italian-American car maker Fiat Chrysler (FCA) revealed it had made a “transformative” merger proposal to French-based rival Renault in a deal that would create the world’s third-ranked largest car manufacturer.

Auto stocks climbed 1.8 per cent in Europe and shares of both companies rallied on the news.

The proposal was discussed at a meeting of the Renault board on Monday night (Australian time).

The French group released a statement after the meeting saying a merger could “improve Renault’s industrial footprint and be a generator of additional value for the Alliance” with Japan’s Nissan and Mitsubishi.

Collaboration between automakers has taken on greater importance in recent years as they seek to build their technological capabilities in pursuit of electrical vehicles, net connectivity and artificial intelligence for vehicles, the Associated Press reported.

Automakers are also under pressure from regulators, particularly in Europe and China, to come up with electric vehicles capable of meeting tougher climate change regulations.

FCA holds a strong position in the US and SUV markets, while Renault is stronger in Europe and in developing electric vehicles.

Analysts say both companies are weak in China, which is now the world’s largest auto market.

The FCA-Renault deal would create a car maker selling 8.7 million vehicles annually with a strong presence across key regions, automotive markets and technologies, FCA said.

The merged company would generate 5 billion euros ($8.1 billion) in estimated annual savings.

The “broad and complementary brand portfolio would provide full market coverage, from luxury to mainstream,” it added.

If successful, the FCA-Renault tie-up would alter the competitive landscape for rival car makers from General Motors to Peugeot maker PSA Group, which recently held inconclusive talks with FCA.

It could also 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.

The FCA-Renault plan would see the two car makers merged under a listed Dutch holding company. After payment of a 2.5 billion-euro dividend to current FCA shareholders, each investor group would receive 50 per cent of stock in the new company.

It would be chaired by John Elkann, head of the Agnelli family that controls 29 per cent of FCA, sources familiar with the deal talks told Reuters. Renault chairman Jean-Dominique Senard would likely become CEO, one said.

Mediobanca analysts said in a note: “The three players together, assuming also Nissan taking part to the deal, would sell more than 15 million units per year with clear economies of scale.”

Pressure for consolidation among car makers has grown with the challenges posed by electrification, tightening emissions regulations and expensive new technologies being developed for connected and autonomous vehicles.

“The case for combination is also strengthened by the need to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry,” FCA said.

But the deal still faces political and workforce hurdles in Italy, and potentially also in France. Most of FCA’s European plants are running below 50 per cent capacity.

Fiat said the planned cost savings would not depend on plant closures.

The French government, Renault’s biggest shareholder with a 15 per cent stake, supports the merger in principle but will need to see more details, its main spokeswoman said.

France will be “particularly vigilant regarding employment and industrial footprint,” another Paris official said – adding that any deal must safeguard Renault’s alliance with Nissan, which had recently rebuffed a merger proposal from the French car maker.

The Italian government may also seek a stake in the combined group to balance France’s holding, a lawmaker from the ruling League party said on Monday.

-with AAP