Generic drugs are cheaper copies of branded medicines

The agreed offer is up to half in cash and the rest in shares.

"Bringing our two companies together will vastly enhance our leadership position in the global generic industry," said Teva boss Israel Makov.

Teva was the world's biggest generic drug maker until Swiss group Novartis swallowed Germany's Hexal in February.

Teva forecast its sales after the merger with Ivax would top $7bn a year.

Rivalry

This compares with a forecasted $5bn in sales for Novartis' Sandoz generic drug manufacturing unit after it absorbed Hexal and Hexal's US unit Eon Labs.

Generic drug manufacturers produce drugs which are exact replicas of branded drugs whose patents have lapsed, making them cheaper to buy and popular with government health care programmes.

Under the merger plan, Ivax shareholders are being offered either $26 a share or 0.847 Teva American Depository shares in exchange for each Ivax share they hold.

The two firms said they expect the tie-up to be completed later this year or early in 2006, though it requires the approval of US and European competition authorities.

Ivax brings its branded drug portfolio into the merger as well as boosting Teva's sales of generic drugs, and expanding Teva's operations into Latin America and Eastern and Central Europe.

After the merger, Teva will operate in over 50 countries and will employ 25,000 people and Ivax will become a subsidiary of the Israeli group.

Strategy

Analysts predicted further consolidation would take place in the generic drug industry, which is fragmented between some 150 companies worldwide.

Teva's purchase "makes a lot of sense", said London-based pharmaceutical analyst Frances Cloud of Nomura.

Novartis paid 5.6bn euros ($6.7bn; �3.8bn) for Hexel.