The deal values Monsanto at $33bn (£21bn), and its shareholders will have one-third of the equity of the new company, which will have a stock market value of $96bn (£62bn).

It would be the seventh largest corporate takeover in history, just behind the recent Daimler-Benz acquistion of Chrysler last month. All but one of those takeovers have occurred in the last year as stock market values have soared.

American Home Products, the senior partner in the merger, is a leading producer of over-the-counter remedies in the US, making such well-known brands as Advil (pain relief), Chap Stick (lip balm) and the cough syrup Robitusson.

Monsanto produces a range of chemicals for the agricultural and pharmaceutical industry, including Lasso herbicides and the sweetener Nutrasweet.

The company will have combined sales of $23bn (£16bn) and says its expects to save between $1.25bn and $1.50bn annually from synergies arising from the merger, including combined research and marketing.

AHP President John Stafford will have to share power

The company will be run on a co-operative basis, with Monsanto chairman and CEO Robert Shapiro sharing the office of chairman with American Home Products chief John Stafford.

The company said the merger would mean a new name and a strong global presence in agriculture, animal health, consumer health, and nutrition.

Six months ago, American Home Products was the target of a takeover bid by Smith Kline Beecham, the US/UK pharmaceuticals company, which was abandoned when SKB entered merger talks with Glaxo.

Those talks - which would have led to the creation of the world's largest pharmaceutical company - also broke down.