The news boosted interest in South Korean share prices, with Seoul's Kospi index closing 2.2% higher on Tuesday at 632.05 - its highest level in eight months.
Confirmation that GM was entering formal takeover talks came in a joint statement from the US car giant, Daewoo Motor and the Korea Development Bank (KDB), acting on behalf of Daewoo creditors.
"The parties will work to reach an agreement on a memorandum of understanding outlining the terms and conditions of the timetable and steps required for the completion of a transaction," the statement said.
The news boosted interest in South Korean share prices, with Seoul's Kospi index closing 2.2% higher on Tuesday at 632.05 - its highest level in eight months.
The KDB said the talks would take place in a third country.
GM said there was no deadline for finalising a deal on Daewoo.
"The main factor is that it has to be a viable business case," said spokesman Rob Leggat.
Italy's Fiat said it will monitor GM's offer for Daewoo before taking a decision on whether to join its partner in the acquisition.
Failed bid
GM, the world's largest car manufacturer, entered negotiations to take over Daewoo after America's Ford Motor Company abruptly withdrew a bid in September last year.
GM has spent the past few months taking a close look at Daewoo's finances and labour situation.
During the 1997-98 Asian economic crisis, Daewoo collapsed under an estimated debt of $15bn.
In November, it was put under court receivership, a process that froze all of its liabilities.
Violent protests
Daewoo Motor's court-appointed management laid off one-third of the company's 16,000 workers early this year.
Daewoo's labour union, fearing that a GM takeover will bring further mass layoffs, has staged violent protests in recent months.
It is upset that GM is reportedly considering not using Daewoo's main plant in Bupyong, west of Seoul, which experts say is outdated.
GM has declined comment on whether it will close the plant, which employs about half of Daewoo's 16,000 domestic workers.
Selling Daewoo is seen as a test of the government's will to carry out the corporate reforms needed to attract foreign investments.
Daewoo, South Korea's third largest car manufacturer, can produce two million vehicles at plants at home and abroad.
Despite its heavy debts, the car maker could help foreign investors penetrate South Korea's closed auto market and serve as a stepping stone into China.