Mitsubishi reported a loss of $415m in the six months to September
The French car maker Peugeot Citroen has said it is in talks with Japan's Mitsubishi Motors about a "strategic partnership".
They already co-operate together in Russia, on electric cars and developing four-wheel drive vehicles.
A Mitsubishi spokesman said: "It's true that we are discussing various possibilities, and a capital tie-up is among them."
Mitsubishi shares closed up 13% on the news after earlier soaring 22%.
The Nikkei newspaper said the deal would mean Peugeot effectively taking over Mitsubishi through buying a 50% stake. However, Mitsubishi may also buy a stake in the French car maker.
The Japanese carmaker reported a loss of just over $400m in the first half of this year.
It had previously said it was not looking for any car alliances and would go it alone with the backing of Mitsubishi Group.
Toshihiko Tabei from Kazaka Securities in Tokyo said: "It's good news for Mitsubishi Motors. While Mitsubishi Motors still faces other challenges... a Peugeot deal would be positive for its electric vehicles business."