P&O is the world's fourth largest ports operator

In a statement, P&O's board said it had recommended to its shareholders the 470 pence a share offer by PSA.

PSA is owned by Temasek Holdings a Singapore government investment agency which already owns 4.1% of P&O.

The offer beats a previously agreed bid from Dubai Ports World of 443 pence a share and could spark a bidding war.

Speculation about a counterbid has been mounting since Dubai Ports launched its offer in November last year.

Strategic fit

Founded in 1837, P&O has three divisions - ferries, ports and logistics.

PSA will be a strong owner of P&O's businesses Sir John Parker, P&O chairman See P&O's share price

In its heyday in the mid-1920s, it owned a fleet of almost 500 ships before transforming itself in the post-war era to concentrate more on cargo shipping and ports.

P&O said the company's decision to jump ship and ditch support for Dubai Ports was justified on the grounds that PSA was willing to pay 6% more for the group and has agreed to satisfy any regulatory demands.

"PSA will be a strong owner of P&O's businesses," said Sir John Parker, P&O's chairman.

PSA said the enlarged company would have the financial strength and global presence to compete effectively against rival port operators.

"It is our intention to integrate quickly in order to add value to the businesses of the combined group, including ferries," said Fock Siew Wah, chairman of PSA.

Temasek is the second biggest port operator in the world.