The deal will create the world's fifth biggest advertising agency.

The mid-sized agencies are finding it increasingly difficult to compete in the global market

Analyst Paul Richards

Publicis recently lost out in the battle for US group Young & Rubicam, which was taken over by another British firm, WPP.

Combining the forces of Saatchi & Saatchi and Publicis would create a firm with annual revenues of more than $9.5bn (�6.34bn).

It is part of a wave of consolidation which has created giants like WPP, Omnicom, Interpublic and Havas Advertising.

Saatchi & Saatchi is number 12 in the global league table of advertising agencies, Publicis is number 10.

Saatchi chairman Bob Seelert said the networks of the two companies were "extraordinarily complementary and together they will form a real powerhouse in worldwide advertising".

"The mid-sized agencies are finding it increasingly difficult to compete in the global market," said analyst Paul Richards of WestLB Panmure.

The deal is an important stepping stone for Publicis in its ambition to become a global player in the industry.

It has recently made a number of acquisitions in the US.

Colourful history

Saatchi & Saatchi, which now does nearly half of its business in the United States, is famous for once doing the advertising for Britain's Conservative Party.

Today its biggest clients are Procter & Gamble and Toyota, which provide 35% of the firm's sales.

Other top clients are Sony, Du Pont, Hewlett Packard, Visa and Astra/Zeneca, which are served by 150 offices in more than 90 countries.

Saatchi shareholders will own about 30% of the new group, and their shares will be valued at 500p.

Rumours about the deal caused a surge in Saatchi's share price on Monday, which rose by 27% to 421p.

The new group will have 38% of its business in the US, 49% in Europe and 13% elsewhere.

Mr Seelert said the deal would shore up some of the weakness it had in Europe, and give the group "critical mass" in the US.

But while the firm's business is to make its clients famous, Saatchi itself has a colourful if well publicised and turbulent history.

Once run by brothers Maurice and Charles Saatchi, the company grew rapidly with a string of acquisitions to become the world's biggest advertising group.

Brothers forced out

Such was their run of success that at the peak of the 1980s boom, the firm launched an audacious - and doomed - bid to buy one of the UK's largest banks, the Midland.

The fast growth may have helped the brothers reach the position of running the world's biggest advertising firm, but a combination of client conflicts and debts as the economic boom times came to a sudden halt, eventually led to the Saatchis being forced out.

The two left the company in 1995, when it was renamed Cordiant.

Two years later Cordiant was split into Saatchi & Saatchi and Cordiant Communications.

Saatchi also owns media buying group Zenith and PR firm Rowland Worldwide.