The merged company, to be called CDnow/N2K Inc., will compete with cyberspace rival Amazon.com, a web bookseller that in June began selling CDs to more than 3.5 million customers.

The two companies said they would offer about 500,000 items via the Internet and rank third among online retailers.

"The merger of CDnow and N2K unites the two leading brands in online music, creating the most powerful franchise in our marketplace, and one of the clear leaders among Internet companies," said Jon Diamond, co-founder and vice chairman of N2K

"Strategically, with our combined alliances we achieve a ubiquitous position online. Tactically, the combined company will enjoy broad leadership in the most popular musical genres - jazz, classical, country and rock/pop - which is but one example of the complimentary nature of this merger," said Jason Olim, president and chief executive officer of CDnow.

The deal marks the second online retailing merger in October as the race for the upper hand in selling music and books in cyberspace heats up.

Earlier this month Bertelsmann, the world's biggest book publisher, this month agreed to buy half of barnesandnoble.com, the online division of Barnes & Noble, the largest U.S. bookseller.

The merger comes after weeks of speculation that CDnow and N2K would join forces in cyberspace in order to offset their falling stock prices and poor earnings results.

On Thursday N2K reported a widening loss in third-quarter earnings of $19.7 million.

CDnow reported a loss for the third quarter of $12.8 million, or 74 cents per share, compared with a loss of $2.6 million, or 36 cents per share, for the same quarter in 1997.

In trading on the New York Stock Exchange, N2K stock rose 81 cents to $6.31, but well off its 52-week high of $34.62. CDnow stock fell 56 cents to $8.875, also far from its year's high of $39.