Travel firm First Choice is to merge with the tourism division of Germany's TUI to form Europe's top tour operator.
Travel companies are having to change the way they do business
The new firm, TUI Travel, will have 27 million customers and £12bn in sales. It will be based in the UK and there are plans to list its shares in London.
First Choice said that there would be job "duplication", but added it was too early to say if there would be cuts.
The move comes after rivals Thomas Cook and My Travel merged, following changes in the way consumers book holidays.
Thomson Holidays owner TUI will have a 51% stake in the new firm, with First Choice controlling the remaining 49%.
The deal still needs to be approved by competition regulators and First Choice shareholders, and some analysts questioned whether it would get clearance.
According to Mark Reed, an analyst at Kepler, regulators may be worried that too much power would be concentrated in the hands of a few big companies.
EUROPE'S TOP TOUR FIRMS
1. TUI Travel
2. Thomas Cook
3. Rewe Touristik
4. Grupo Iberostar
"You can argue whether regulators would allow the big four to go down to the big three," Mr Reed said. "And so there must be even more of a question mark whether they will let it go down to the big two."
First Choice, based in Crawley, said it was confident the deal would get the green light.
"We don't anticipate any issue, because the definition today of our market place is very different to what it was a number of years ago," said Peter Long, chief executive of First Choice.
Mr Long, who will be chief executive of the newly formed TUI Travel, said the deal between the two firms only became a possibility after their rivals joined forces.
A spokesperson for First Choice said the companies were a good strategic fit because the UK firm focused on activity and speciality holidays, while TUI had built up a larger consumer business based on lower-cost deals.
They added that even though there will be "some job duplication of jobs, you have to keep in mind that it will be a growing business" and as such other opportunities should be created within the new company.
First Choice said in a statement that "the strong strategic fit of the businesses, combined with a leading management team, provides the opportunity to create one of the world's most profitable travel groups".
It added that the company would deliver "sustainable revenue and long-term earnings growth while deriving cost advantage".
The two firms estimate that the merger will allow them to save about £100m a year.
TUI's shares closed up 10% in Frankfurt, while First Choice's gained more than 8% in London.
SOME TUI BRANDS
The move comes as travel companies try to cut costs and boost sales, at a time when many travellers are booking their own holidays and hunting deals online.
The merger comes a month after UK firm MyTravel said it would combine with Germany's Thomas Cook.
"The question remains whether TUI can achieve solid margins in the tourism business in the medium term," said Nils Lesser, an analyst at Merck Finck.
TUI employs about 8,000 staff in the UK and runs Thomson Holidays with nearly 730 travel shops nationwide.
It recently announced plans to cut a total of 3,600 jobs across Europe, with 2,600 going in the UK. The changes are part of a 250m euro (£168m) cost-cutting programme.
TUI UK's and Thomson Travel's headquarters are in Luton. Thomson Fly, the company's airline, has head offices in both Luton and Coventry.
Analysts said that TUI would now be able to concentrate on its shipping business.
The German firm also announced on Monday that it made a net loss of 893.3m euros in 2006.