The statement, issued just after the stock market closed and while the Chancellor was still delivering the Budget, will create a new pounds 2bn player in Europe's travel industry. A statement finalising the deal is expected within the next few days.
First Choice announced last week that it was in preliminary merger talks. Attention then focused on Airtours and Preussag of Germany, and it is possible that these companies could yet enter the fray with a hostile bid.
The new group would be called Kuoni Holdings with Ian Clubb, the chief executive of First Choice, becoming executive chairman. Kuoni's Riccardo Gullotti would be chief executive. The company's board would include 14 directors drawn from both businesses, and it would be listed on the London and Swiss stock exchanges.
Under the terms of the deal, First Choice's main brands will be retained. These include Sovereign and Twenties, as well as Unijet and Hays & Jarvis, both acquired last year.
First Choice, which is Britain's third-biggest holiday company behind Thomson and Airtours, would move into second position in the UK market, with a market share of around 18 per cent. Mr Clubb said: "We are delighted with the deal. We don't expect any competition problems."
Kuoni is Switzerland's biggest tour operator and has built a reputation for providing up-market, longer-haul holidays with margins double those on mass-market packages.
Under the terms of the merger being discussed, Kuoni shareholders would own 53 per cent of the enlarged company, and First Choice shareholders 47 per cent, the companies said.
"Kuoni and First Choice would be a unique combination that would benefit shareholders, customers and employees of the two groups,'' said the companies in a statement. The companies declined to comment on the implication for jobs.
The discussions come as European tour operators pair up to increase their buying power for hotel accommodation and double up on transportation to and from resorts.
First Choice owns package-tour companies and the Air 2000 and Leisure International charter airlines. It is more than half way through a three- year reorganisation to push pre-tax profit to 4 per cent of sales by October 1999.
First Choice had pre-tax profit of pounds 50m ($80.5m) in fiscal 1998. For the year ended 1997, Kuoni had pre-tax profits of pounds 56.6m.