The new company, 51 per cent held by P&O, will run Arkona's 1,200 berth Aida and order two more 1,270-berth vessels for delivery by 2003.
P&O will make an initial investment of 150m German marks (pounds 50m) and has the option to acquire the rest of Aida Cruises from the Rahe family after the new vessels are delivered.
P&O believes that the German market for ocean cruises remains underdeveloped. It said one in 270 Germans takes a cruise each year, compared with one in 94 Britons and one in 43 Americans.
P&O shares rose 1p to 921p.