The two European engineering giants are to merge their power generation businesses into a 50:50 joint venture, ABB Alstom Power, which will have sales of $11bn and an estimated 25 per cent share of the world market.
As part of the deal, Alstom will pay $1.5bn in compensation to ABB, which is contributing the bigger business to the joint venture.
But Alstom will recoup $900m of this by selling its heavy duty gas turbine business to General Electric. GE currently provides the technology for Alstom heavy duty gas turbines.
Alstom and ABB said that the merger would produce savings of $450m a year within three to four years. They are putting aside about $670m to cover restructuring costs and job reductions among the 54,000-strong workforce.
Neither company would say how many jobs were at risk but Goran Lidhal, ABB's chief executive, said: "In our extremely competitive industry we need permanently to improve efficiency."
ABB Alstom Power's 8,600 UK employees are spread across four locations - Lincoln, Rugby, Stafford and Knutsford. The two main manufacturing sites - Lincoln, which produces gas turbines, and Rugby, which makes steam turbines - are both owned by Alstom.
The merged business will leapfrog both GE and Siemens into number one place in the world league table of power station suppliers.
However, neither Alstom nor ABB said they expected to face any problems with competition authorities since a rationalisation of Europe's power generation equipment industry was long overdue.
The creation of ABB Alstom Power is in part a response to Siemens' acquisition last year of Westinghouse's non-nuclear power generation interests, a deal which pushed Alstom down to fifth place in the world league.
Pierre Bilger, the Alstom chairman, said that its smaller size had begun to prove a handicap, putting it in a "worrying position" in the European market.
According to an analysis by Datamonitor Industrial, ABB and Alstom respectively captured just 8 per cent and 7 per cent of the world power generation equipment market last year, compared with 39 per cent for GE and 15 per cent for Westinghouse.
Although yesterday's merger was instigated by Alstom, Mr Bilger said it had no plans to put its other two businesses, transportation and electrical transmission and distribution, into joint ventures.