The new coalition still falls four seats short of a majority
Iraq's two biggest Shia political groups have announced they are to form a coalition, the first such announcement since elections in March.
The deal between the Iraqi National Alliance and The State of Law bloc, led by incumbent Prime Minister Nouri Maliki, was announced in Baghdad.
The number of seats held by the new coalition falls just short of the number needed to form a government.
It has not been revealed who would be their choice for Prime Minister.
The new coalition is four seats short of the 163 needed to gain a majority of the 325-seat parliament.
The announcement deals a serious blow to the Iraqiyya bloc, led by former Prime Minister Iayd Allawi, reports say.
Mr Allawi's secular political group - which had garnered the support of many of Iraq's Sunnis - won a two-seat victory in the election.
But the deal between the two Shia-dominated blocs could marginalise the Iraqiyya list, reports say.
Another loser in the deal may be Prime Minister Maliki.
In April one of the main groups within the INA, supporters of the radical Shia cleric Moqtada Sadr, rejected Mr Maliki as their choice for Prime Minister.
During his time in office Mr Maliki led a crackdown on the military wing of the Sadr movement, the Mehdi Army, which has not been forgotten, correspondents say.
The Sadrist bloc and the Supreme Iraqi Islamic Council support Ibrahim Jaafari, also a former interim Prime Minister.
The announcement of the deal was made by Mr Jaafari's adviser, Abdul Razzaq al-Kadhami.
"An agreement was reached to form the largest parliamentary bloc through the union of the two blocs," he said.
"The most important thing is to form an Iraqi government, to establish a government programme and to nominate the next prime minister."
The announcement may lead to Sunnis feeling they have been marginalised and risk a further increase in sectarian violence, a spokeswoman for the Iraqiyya bloc, quoted by the Associated Press said.
The announcement comes just days after a partial recount of ballots cast in Baghdad was set under way.
The recount was demanded by Mr Maliki, despite winning more seats in the area than his rivals.