The agreement will see National Power paying about £410m ($650m) for a 25% stake in Unión Fenosa Generación, (UFG) a pure generation company which the Spanish power group will create and then split from its distribution business next year.

Both partners will also take a 2% stake in each other.

Looking abroad

Described by Unión Fenosa as an "Iberian alliance", UFG will be the exclusive conduit for investment by both power groups in new power-related activities in Spain, Morocco and Portugal.

But the alliance will also seek further investment around Europe and in Latin America.

UFG will be the main vehicle for investment in southern Europe

Union Ferosa is the third largest power generator in the Spanish market with a 30% share.

National Power will have the option to take a further 5% in the venture after construction of new generation projects.

Beta Capital analyst Antonio Cruz said: "The accord is very positive. I think the key point is that it is not just confined to National Power buying a stake in the new generation unit, but it also includes joint investments at home and overseas in various energy projects. It's a really wide-ranging collaboration agreement."

Fenosa opted for the alliance with National Power over Italy's Edison Spa.

According to the Financial Times newspaper, Unión Fenosa, which has been advised by US investment bank Goldman Sachs, was leaning towards National Power over Edison because of the UK company's greater experience in a liberalised electricity market.

The country has adopted a UK-style pool trading system for its electricity market.

Shares in Unión Fenosa, Spain's third largest power company, continued their to rally after the announcement rising 55 pesetas to 2,170.

National Power shares fell 7 pence to 508p in a wider slide on the London sharemarket. The announcement came after trading had finished.