The deal, which is worth about $5.3 billion, would create the world's fourth largest auto group. The announcement comes less than a week after DaimlerChrysler (DCX) walked out on negotiations with Nissan.

"Renault is now convinced of the merits of a strategic alliance between Renault and Nissan," Renault said in a statement. Nissan, Japan's No 2 automaker, said it was negotiating solely with Renault, adding that the French company's offer could include an equity stake in Nissan Diesel Ltd.

Under Japanese rules, an investor holding 33.4 to 50 per cent of a group has veto power on the board but is not exposed to claims on its asset from the Japanese company's creditors. "We will work out conditions for forming an alliance in the days ahead so that a conclusion can be reached by the end of this month," Yoshikazu Hanawa, Nissan'spresident and chief executive officer, said in a prepared statement.

While both companies sounded their horns, analysts see some rough road ahead. "It's a bold move," said James Kelleher of Argus Research. "Renault will have its hands full." Kelleher noted that Nissan's current situation is similar to that of Chrysler in the 1970s, when the American automaker was battered by inflation and overseas imports.

"If the Japanese economy were to turn around, Nissan could become a very viable brand," he said. "It could be a great deal for Renault, but it's going to mean a little heavy lifting for a while." David B Healy of Burnham Securities said the deal was very risky for Renault, but, he said, the French company probably could not resist the appeal of worldwide diversification and a position in the Asian market.

"Nissan has been a financial black hole," Healy said. "It's lost money six out of the last seven years. Nissan has been one of these permanent turnaround companies. It's always supposed to getbetter, but it never does." Edgar J Faler of Olde Discount Corp. said the deal is "a new chance on life" for Nissan. "It makes sense for both parties strategically," Faler said. "But both have significant hurdles ahead of them to pull this off. The French government has a sizable stake in Renault and the Japanese government has expressed an interest in trying to help broker a deal. It's certainly a dynamic time in the auto industry."