People familiar with the situation told the Wall Street Journal of the plans.
PSA Group CEO Carlos Tavares would become CEO of the merged company, and Fiat Chrysler Chairman John Elkann would chair the new entity, the sources told the paper.
Peugeot's parent will occupy six board seats and Fiat gets five, according to the sources. They said PSA will pay 3 billion euros to its shareholders from selling its stake in Faurecia, a French auto parts maker.
The companies have discussed the deal with the governments of the U.S. and France, the sources said. The French government owns 12% of PSA Group.
Fiat Chrysler and PSA also talked about the possibility of combining earlier this year,
FCAU shares were trading at last check up 7.2% at $15.25. PSA shares traded at $30.14, up 2.9%.
Both companies sell many of their cars in Europe, which creates an opportunity for hefty cost cuts, The Journal reports. But as European auto companies have learned over the decades, the political sentiment against cutting factory jobs is strong.
This article is commentary by an independent contributor. At the time of publication, the author held TK positions in the stocks mentioned.