The Prime Minster of Australia welcomed the merger deal.

If the merger goes ahead the new firm will be dwarfed only by US aluminium maker Alcoa, knocking South Africa's Anglo American into third place.

The new group will be worth �20bn ($28.7bn) and generate close to �14bn in annual sales.

"This is a great resource opportunity for Australia," said the country's Prime Minister John Howard, applauding the deal.

Obstacles

The merger will not be completed until shareholders and regulators both in Australia and in Europe have approved the deal.

BHP's areas of expertise:

Iron ore Coal Copper Oil and gas Diamonds Silver Lead Zinc

Until this happens, a counter bid for Billiton from its arch rival could emerge, said market officials.

"The prospect of a counterbid from Anglo is fairly high as there are very few companies now left in the sector, so the opportunities are few and far between," said one dealer.

"For the next five weeks, or however long it takes, there's going to be a risk the deal could fall over," said Credit Suisse First Boston analyst Peter O'Connor.

Stock market listings

If the merger goes ahead, the new group will be named BHP Billiton.

Billiton's areas of expertise:

Aluminium and alumina Chrome and manganese ores and alloys Steaming coal Nickel and titanium minerals Copper

It will be based in Melbourne in Australia, but an additional corporate management centre will be retained in London, BHP said.

BHP's chief executive Paul Anderson will retain the same position in the new group for the first year.

He will then step down and hand over the steering wheel to the Billiton chief executive Brian Gilbertson.

Its shares will be listed on the stock exchanges in Sydney and London, and the company will have additional listings in Johannesburg and New York.

Because BHP is nearly twice as large as Billiton, the Australian company will control 58% of the equity with the UK company controlling 42%.

No job cuts

Size, geographical reach and extensive product diversity are regarded as important ways of reducing risk in the volatile mining industry.

This deal will create a group with extensive reach in all these areas, not least since the two groups are involved in mining in different countries and tend to be involved in different raw materials.

"Our operations, whilst they're very complementary, are not overlapping," Ms Frostick said.

Consequently, no substantial job cuts are planned at the moment.

"We believe this will be a very positive announcement for our workers," Ms Frostick said.

BHP shares closed 2% higher in Australia. Billiton rose 15% when trading started in London.

Merger wave

The mining industry has already undergone a massive wave of mergers and take-overs.

The BHP Billiton deal could set off another wave.

"The market believes we're entering a period of aggressive corporate activity at the big end of the mining sector," said head of institutional sales at brokerage Burdette, Buckeridge & Young; Richard Newton.

Ahead of its deal with Billiton, BHP held joint venture talks with Rio Tinto, another UK company, in 1999, but the two were unable to agree on terms.