The agreement which also makes the group the world number two in trucks after DaimlerChrysler follows the sale of Volvo's celebrated car division to US giant Ford for $6.5bn earlier this year.
Leif Johansson, Volvo chief executive, said yesterday: "A competitive company with two of the industry's strong brands is being created, with major development resources and volumes, particularly in the critical diesel engine segment."
Following its decision to sell its car division to concentrate on trucks earlier this year, Volvo snapped up a 13.5 per cent stake in Scania with the intention of launching a bid. But its approaches met a firm rebuff from both the Scania board and Investor, the investment vehicle for the Wallenberg family owns 49 per cent of the Scania voting rights
Since then it has continued buying in the market and was sitting on a stake of more than 20 per cent in its rival before today's deal.
Justifying his change of heart, Marcus Wallenberg, president and chief executive of Scania, said yesterday that the group was keen to realise the market value of its holding, following a strong rebound in profits in the first half of the year.
Mr Wallenberg said: "The reason for the transaction being conducted today is that we are in agreement on the valuation of Scania and we have to a considerable extent the same perception of the synergy benefits that can be achieved by bringing the two companies together."
Investor has agreed to swap 40 per cent of its Scania holding for Volvo stock, giving it up to 13 per cent of the voting rights in the combined group.
The enlarged group will have 31 per cent of the European truck market, putting it ahead of of Mercedes Benz, the bus and truck arm of German- American giant DaimlerChrysler, but second in global terms with 19 per cent of the world market.
Volvo is offering 315 kronor a share or six Volvo shares for five Scania, a 29 per cent premium to Scania's closing share price on Thursday of 244. Scania shares soared more than 30 per cent on the news.
The Scania board said in a statement that it thought the value of the offer was fair but would need more time to review the terms in detail before making a formal recommendation.
Volvo shares slipped back after the group indicated it would now be shelving earlier plans for a share buyback. Volvo said it intended to keep Volvo and Scania as separate brands. The deal is expected to generate 4 to 5bn kronor of synergies annually within three years.
Analysts said that the deal would give the two groups some advantages in scale at a time when the development and marketing costs of new trucks is rising steadily.
However, the deal raises question marks over the ambitions in the commercial vehicle area of Volkswagen, the German carmaker which also made an unsuccessful takeover approach to Scania last year.