The deal will create a global giant with a market capitalisation of $90bn (pounds 54bn), revenues of more than $130bn, annual unit sales of 4m and a workforce of 421,000.
The deal, which came just 24 hours after the two giants announced they were in merger talks, came as another German carmaker, VW, pipped its rival BMW in the battle for control of Rolls-Royce.
Jurgen Schrempp, Daimler-Benz chairman, hailed the deal as "an historic merger that will change the face of the industry."
Though Mr Schrempp and Robert Eaton, his counterpart at Chrysler, billed the agreement as a "merger of equals" industry observers said that Daimler- Benz had gained the upper hand.
Daimler-Benz shareholders will hold 57 per cent of the shares in the new company - to be called Daimler Chrysler - while Chrysler shareholders will control 43 per cent.
Daimler Chrysler will be registered in Germany and have a German-style two-tier board structure. It will have head offices in Stuttgart and Auburn Hills, Michigan, and its shares will be traded in Frankfurt, with a secondary listing in New York.
The two companies chose London as the venue to announce details of the deal. Mr Eaton said the choice was representative of the fact that Daimler Chrysler would be a "truly global company".
Mr Schrempp and Mr Eaton will oversee the merger as joint chairmen and chief executive officers. However, Mr Eaton announced he would step down from the board after three years, leaving Mr Schrempp in charge.
Both stressed the deal was not about cost-cutting. The geographical overlap between the two companies is minimal, with Chrysler making 89 per cent of its revenues in North America while 65 per cent of Daimler's sales are in Europe.
The product ranges are also complementary. Through its Mercedes-Benz brand, Daimler concentrates on luxury passenger cars, trucks and heavy vehicles. Chrysler makes the cheaper Dodge cars as well as Jeep four-wheel drive vehicles.
The fit means that the deal is unlikely to face objections from competition authorities.
Daimler and Chrysler promised there would be no redundancies or plant closures. "With our combined strength we can grow, add volume and create jobs on both sides of the Atlantic," Mr Schrempp said.
Both firms are currently stretching their capacity to the limit to meet demand. One benefit of the merger will be that they will be able to make better use of the capacity they have. "That's the beauty of this merger when you do it at the right time," said Mr Schrempp.
Nevertheless, the merged company is planned to produce cost savings of $1.4bn in 1999. The firms told analysts that combining their purchasing operations would allow them to save $300m on their $60bn annual purchasing bill by negotiating better terms. Further savings would be made by combining research & development.
Within three years the company plans to have saved $3bn by sharing technology and working practices and making better use of existing capacity. Mr Schrempp described the figure as "conservative".
However, both companies stressed their brands would be kept separate. "They are the most important thing this company owns," said Mr Eaton.
The deal was welcomed by shareholders on both sides of the Atlantic. After their initial surge on Wednesday, shares in Daimler gained another DM9 to close at DM202. In late-morning trading in New York, Chrysler shares reached $53.06, up $4.25.
Shares in other European car makers also surged as investors revived hopes of further consolidation. Analysts said Ford and Fiat, the Italian group, were favourites to follow Daimler and Chrysler up the aisle.
Meanwhile the Tracinda Corporation, the holding corporation headed by Kirk Kerkorian and which has a 13.75 stake in Chrysler, welcomed the deal, describing it as a "bold initiative to build upon its strong domestic position and stay ahead of the curve in an industry poised for global consolidation".
Deutsche Bank, which owns 21.8 per cent of Daimler, said it supported the merger. The German banking giant will be Daimler Chrysler's largest shareholder with 12 per cent.
As the largest shareholder in Chrysler Mr Kerkorian has gained more from the effective sale of the smallest of the big three US car manufacturers than anyone. A combined investment in the car company of about $1.4bn is now estimated at close to $5bn.
Mr Kerkorian, bought his first batch of Chrysler stock, representing about 10 per cent of the company, in 1990, when the company was struggling through the recession. He topped up his interest in subsequent years. The average price of his share purchases comes to about $13.82 a share.
Mr Kerkorian might have accumulated still more Chrysler stock had it been for a peace deal he reached with Robert Eaton in 1996. After launching a distinctly unfriendly bid to take over the company in 1995 with his friend and former Chrysler CEO, Lee Iacocca, Mr Kerkorian agreed finally to lay down his weapons and limit his stake to under 13.8 per cent.
Although most observers agreed that Daimler-Benz had the upper hand in the merger, analysts wondered whether its shareholders had fared as well. "Chrysler have got a good deal. They're much more cyclical than Daimler and have struggled in the past two recessions. The future is only getting tougher," said one leading analyst, adding that the addition of Chrysler's earnings, which are more sensitive to the economic cycle and are therefore seen as lower quality, could wipe out Daimler's premium stock market rating.
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