Mercosur was set up in March 1991 by Argentina, Brazil, Paraguay and Uruguay under the Treaty of Asuncion. The 1994 Treaty of Ouro Preto gave the body a wider international status and formalised a customs union.
Brazil and Argentina are Mercosur's economic giants. Bolivia, Chile, Colombia, Ecuador and Peru are associate members; they can join free-trade agreements but remain outside the bloc's customs union. Moves to include Chile as a full member were suspended after Santiago signed a free-trade deal with the US in 2002.
Mercosur tariff policies regulate imports and exports and the bloc can arbitrate in trade disputes among its members.
In the longer term, Mercosur aims to create a continent-wide free-trade area, and the creation of a Mercosur development bank has been mooted.
The Mercosur presidency rotates between member states every six months.
Mercosur institutions include the policy-making Common Market Council and the Common Market Group, which implements policies and monitors compliance with the council's decisions.
A Mercosur parliament was inaugurated in December 2006. It began meeting in May 2007 in the Uruguayan capital Montevideo. Initially, the parliament will have no power other than persuasion.
Mercosur has been riven by disputes among its members. When Brazil's car industry became increasingly competitive, aided by the devaluation of its currency in 1999, Argentina responded by imposing tariffs on Brazilian steel imports. The spat was resolved in December 2000 when the two countries signed a bilateral agreement to end the crisis.
In 2006 Argentina and the bloc's smallest country Uruguay clashed over plans to build two large pulp mills along the border - the biggest foreign investments Uruguay had ever attracted. Argentina said it feared pollution and the impact on tourism and fishing.
The matter went to the International Court of Justice (ICJ), which ruled in favour of Uruguay. Argentina pledged to continue its fight against the mills.
The bloc's smaller members, Paraguay and Uruguay, complain of restricted access to markets in Argentina and Brazil and have sought to set up bilateral trade deals outside Mercosur. The organisation's rules forbid this.
There is also the long-outstanding issue of Venezuela's membership. The country was accepted as a full member in July 2006, pending ratification by the other member states, but four years later its status remained in limbo as Paraguay had not yet officially approved the decision. This was mainly on account of objections raised by the Paraguayan Senate, which has expressed doubts over the democratic credentials of Venezuelan President Hugo Chavez.
Critics have accused Mercosur of becoming politicised and moving away from its free-trade origins. Talks to secure a trade accord with the EU began in 1999 but were suspended in 2004, with subsidies for European farmers and tariffs on industrial goods being among the stumbling blocks. The two blocs agreed to resume negotiations on a free trade agreement at talks in Madrid in May 2010, despite opposition from several key European nations including France.
More recently Argentina has enlisted Mercosur countries in its campaign against British sovereignty over the Falkland Islands by persuading them not to allow ships flying the Falklands flag to dock in their ports. Uruguay nonetheless said it would allow British-flagged ships supplying the islands to dock in Montevideo.
Negotiations on a planned, US-backed Free Trade Area of the Americas (FTAA) are similarly mired, with some Mercosur leaders rejecting US free-market policies.