The merger is expected to save the firms billions

The new company will be known as Sprint Nextel and will serve 35 million subscribers, drawing in revenues of $40bn (�20.7bn).

The combined group will be in a strong position to take on market leaders Cingular and Verizon, analysts say.

The two firms have a combined market value of about $70bn.

"Sprint and Nextel are being valued equally in the merger and their shareholders will each own approximately 50% of the new company after the merger," the companies said.

In London, shares in Vodafone rallied on the news of the widely-expected tie-up.

The firm's shares had fallen on Tuesday amid market speculation that the company would back its US partner Verizon Communications in a bid to buy Sprint.

Cost savings

By combining, both Sprint and Nextel are expected to save billions as the industry gears up for investment in new high speed networks.

This merger positions Sprint Nextel for greater success than either company could have achieved alone Gary Forsee, Sprint chairman

Sprint will gain access to Nextel's large base of business customers while Nextel will have the financial clout needed to upgrade its network infrastructure.

Sprint Nextel is expected to have the highest average revenue per user in the mobile industry.

Current chairman and chief executive of Sprint Gary Forsee will head the new company and Nextel president Timothy Donahue will become its chairman.

"This merger positions Sprint Nextel for greater success than either company could have achieved alone," said Gary Forsee.

"We are confident that Sprint Nextel will generate efficiencies that will benefit customers, shareholders and employees."

Kansas-based Sprint currently ranks as the third biggest wireless company in the US, while Virginia-based Nextel ranks fifth.