The merger, which the airlines said will cut costs and enhance revenues to help them battle over capacity and growing competition from no-frills carriers, sent shares of heavily indebted KLM soaring as much as 20 per cent. Air France shares slid as much as 7.4 per cent.

A successful combination of Europe's second-and fourth-ranked airlines, which smaller Alitalia may join later, could serve as a model for tie-ups between other full-service airlines such as British Airways and Iberia.

The merger will bring KLM into SkyTeam, the global airline alliance that includes Air France, Delta and Alitalia.

This is likely to lead to KLM's US partners, Northwest and Continental, joining at a later date, allowing Skyteam to overtake the oneworld alliance led by BA and American Airlines and challenge the top-ranked Star Alliance grouping led by Lufthansa and United Airlines.

Northwest and Continental have already joined Delta in a US-wide domestic alliance. Northwest said on Tuesday it welcomed the KLM-Air France deal but its longstanding alliance with the Dutch carrier would continue to compete with SkyTeam.

At a joint news conference in Amsterdam's Schiphol airport, Air France Chairman Jean-Cyril Spinetta forecast 600 million euros in annual long-term merger benefits and said no layoffs were planned.

But some analysts said Air France's offer, valued at 16.74 euros per KLM share -- a 40-per cent premium over Monday's closing price -- was too rich given that merger savings would be limited by the pair's plans to continue operation as separate branded entities.

"The estimated synergy savings are not that big, especially considering that KLM already has plans to cut 650 million euros of costs on its own," said Bert van Hoogenhuyze, an analyst at Effectenbank Stroeve.

Many governments, which once saw the existence of flag carriers as a matter of national pride, now recognise the need for consolidation. But aviation industry mergers have proved elusive in the past, partly because of bilateral agreements between governments which dictate which airlines can fly where on international routes. Once such rules are modified, analysts say, the sector will be able to consolidate and tackle the over capacity which has made many carriers unprofitable in recent years.