Procter & Gamble is to buy Gillette for $57bn (£30.2bn) and create the world's largest stable of consumer brands.
Procter & Gamble said buying Gillette was 'a unique opportunity'
P&G - whose nearly 300 consumer brands include Wella shampoos and Pampers nappies - and Gillette are both American business icons.
The deal will be paid for mainly in P&G shares, and involves 6,000 job cuts, 4% of the combined workforce of 140,000.
On Wall Street, shares in Gillette closed up nearly 13% on Friday, while P&G slid 2.1%.
The merger will make P&G the world's biggest household goods maker, pushing Unilever into second place.
Despite being a US company, Proctor & Gamble is a major employer in the UK, with 4,900 staff based in the UK and Ireland.
US rival Gillette employs 964 people in Reading and Isleworth. It is not year clear how many UK jobs will be affected.
"It's just too early to be able to predict the impact on a specific geographic area," said Heather Valento, a spokeswoman for the company.
The tie-up of the two US giants creates a company with group sales topping $60bn a year.
Between them, they share 21 brands that each boast annual sales of more than $1bn - five of Gillette's brands and 16 of P&G's are blockbusters.
Ohio-based P&G has expanded from a family-run soap and candle store into a global group with factories in 80 countries.
Founded in 1901, Boston-based Gillette is famous for its shaving products and its advertising slogan, "Gillette - the best a man can get".
Retail analysts say the tie-up could change the balance of power between supermarkets and manufacturers.
The big attraction of the deal is that their grooming brands complement each other as P&G specialises in hair and skincare for women - such as Max Factor make-up - while Gillette focuses on male grooming.
P&G predicted cost savings of between $14bn and $16bn from economies of scale and internal restructuring.
The merger has won the backing of American investment guru Warren Buffett.
"This deal is going to create the greatest consumer products company in the world," said Mr Buffet, who is also Gillette's largest shareholder. "It's a dream deal."
Mr Buffet's investment firm, Berkshire Hathaway, owns 96 million Gillette shares and he plans to increase his eventual stake in P&G to 100 million.
P&G said that the deal would boost annual sales growth by roughly 2% to between 5% and 7%.
It plans to accelerate the spread of Gillette brands in developing markets like China, Russia, Mexico and Turkey.
P&G is offering Gillette shareholders 0.975 of its shares for each Gillette share they hold, equal to an 18% premium on the closing price on 27 January.
The offer values Gillette's shares at about $54 a share.
As well as issuing new shares to Gillette shareholders, P&G plans to spend between $18bn and $22bn buying back its own shares in the next year and a half, which it said would have the same financial impact on its books as if the offer were 40% cash.
Gillette's chief executive James Kilts is to join the board of the merged company, becoming P&G vice chairman.
The two firms expect to complete their merger in the autumn of 2005, subject to regulatory approval.
The European Union's competition commissioner Neelie Kroes has already said she expects to review the merger, as a matter of routine.
Shares in European rivals rose on Friday as investors wondered if the household goods sector was about to be gripped by merger mania.