The two companies announced on Tuesday a merger of equals. The combined group had l997 sales of $11bn (£8bn) with strength in newsprint, fine papers and packaging board. The Finnish Government, which owns 44% of Enso, has given its approval to the deal. The company expects to make savings of $200m (£130m) yearly from coordination of purchasing and increased specialisation.

The new company will be domiciled in Finland with a cross-listing on the Stockholm Exchange. This will give it the advantage of trading in Euros when the new single currency begins operation in six months time. Finland, but not Sweden, will be a member of the Euro club.

Stora Chairman Claes Dahlback, who will be chairman of the new company, said that "the merger is based on an excellent strategic fit between these two strong companies, creating a global player in an increasingly competitive industry."

The paper industry faces problems of overcapacity and falling prices with too many players in the world market. But pulp prices have revived recently, lifting share prices. The new company has a combined capitalisation of $8 billion.

The merger is expected to lead Stora Enso to challenge the world's largest paper company, International Paper, on its home ground in the US. At the moment only 10% of group sales are outside of Europe.

It is also expected to lead to further consolidation in the Nordic paper industry. Stora's Swedish rival SCA has said it intends to move into consumer products and is considering selling its fine paper division, based in Germany. Smaller companies like Norway's Norske Skog or Finland's Metsa-Serla may feel the need for partners.

But analysts warned that there were more sellers than buyers for forestry products companies. "It's hard to see who is on the buy side" commented Enskilda Securities' Carl Johan Krigstrom.

Stora has been part of the Wallenberg financial empire, and investors were hoping that the group - whose interests are expressed through their holding company Investor AB - would continue to take an active role in the management of the new company.