Krauss-Maffei Wegmann and Nexter Systems agreed to merge services to rationalize Europe's fractured armored-vehicle sector.
German Wegmann and French state holding GIAT Industries, intend to meld the stock of their respective units into a new holding company.
The combined entity would have €2 billion ($2.7 billion) in sales and a backlog of orders valued at €6.5 billion, the companies said.
The merger will be a challenger to General Dynamics and BAE systems.
KMW builds Germany's Leopard-2 tank used also by countries ranging from Norway to Chile to Canada and being sought by Qatar and Saudi Arabia.
Nexter makes the French Leclerc tank and the VCBI infantry fighting vehicle, a lighter armored combat vehicle than a tank.
Nexter is eyeing to trade the VCBI to Denmark in a contest that includes General Dynamics and BAE Systems.
The merger is hopeful of operations by early next year, pending government approvals.
The European Defense Agency has been urging closer ties among the region's arms makers to remain globally competitive.