Tata Steel and German firm Thyssenkrupp have taken the first step towards a merger deal by signing a memorandum of understanding.
The companies said the move will lead to the creation of a leading European steel enterprise.
Merger talks started around 18 months ago after Tata decided not to sell its UK steel business.
The flat steel businesses of the two companies in Europe and the steel mill services of the Thyssenkrupp group will merge in the proposed 50:50 joint venture.
The companies employ around 48,000 workers, with Tata owning UK plants including Port Talbot in South Wales, which employs 4,000.
Andrew Robb, chairman of Tata Steel Europe, said: "Today's announcement marks the latest step in building a future for Tata Steel's activities in Europe which is sustainable in every sense.
"Both Tata Steel Europe and Thyssenkrupp share a vision of supplying the most advanced quality products and services to customers in the world's most demanding markets.
"The combination of our two businesses would provide the strongest possible foundation for achieving this vision, creating a global leader for the long term."
The merger between the Indian conglomerate and its new German partner is expected to be completed next year.
Mr N Chandrasekaran, chairman of Tata Steel, said: "The Tata Group and Thyssenkrupp have a strong heritage in the global steel industry and share similar culture and values.
"This partnership is a momentous occasion for both partners, who will focus on building a strong European steel enterprise.
"The strategic logic of the proposed joint venture in Europe is based on very strong fundamentals and I am confident that Thyssenkrupp Tata Steel will have a great future."
Dr Heinrich Hiesinger, chairman of the executive board of Thyssenkrupp, said: "This business combination creates a strong number two and is thus much better positioned to cope with the structural challenges in the European steel industry.
"With Tata Steel, we have found a partner with a very good strategic and cultural fit.
"Beyond a clear performance orientation, we also share the same philosophy of corporate responsibility towards employees and society."