PSA Group, the French owner of Peugeot, is investigating a merger with its US-Italian rival Fiat Chrysler, it has confirmed.
An agreement between the two car manufacturers would create a business with a total market value of nearly $ 50 billion (£ 39.9 billion).
This is Fiat Chrysler's second attempt at a merger this year after it withdrew from a deal with Renault in June.
Fiat Chrysler shares jumped 7.5% on Wall Street.
The potential merger would face significant political and economic barriers.
Discussions remain in the early stages and there is no guarantee of a final agreement.
However, if the two companies are combined, PSA chief Carlos Tavares is expected to lead the expanded group.
John Elkann, chairman of Fiat Chrysler and head of Italy's Agnelli industrial dynasty who oversees the business, would retain the same position in the new company.
A merger of the two groups would bring a number of brands under one roof, including Alfa Romeo, Citroen, Jeep, Opel, Peugeot and Vauxhall.
- Fiat Chrysler withdraws bid for Renault
The talks come months after a proposed association between Fiat Chrysler and French car manufacturer Renault collapsed.
Fiat Chrysler had described his bid for Renault as a "transformative" proposal that would create a global image.
The industry is shifting towards electric models, along with stricter emissions standards and the development of new technologies for autonomous vehicles, have put increasing pressure on automakers to consolidate.