Under the deal, Mitsubishi Motors would spin off its truck and bus operations into a separate unit in which Volvo would take a 19.9 per cent stake.

The Swedish group would also take a five per cent stake in the parent company of Japan's fourth-largest automaker, which plans to by a one per cent stake in Volvo for now and raise that to 5 per cent by the end of 2002.

Stressing their close business links in the past, the two companies' presidents told reporters the deal was prompted not only by potential savings and synergies but also by the need to become bigger in an increasingly competitive auto industry.

``We simply had to make up our minds to do something bigger and better than what was before and that's what we did,'' AB Volvo president and CEO Leif Johansson told a news conference in Tokyo.

Volvo is also currently taking over Swedish rival Scania and the combination of Volvo, Scania and Mitsubishi Motors would be the world's biggest truck and bus group, with combined sales in calendar 1998 of about 2,53,000 units, said Mitsubishi Motors president Katsuhiko Kawasoe.

This puts it slightly ahead of the DaimlerChrysler operations of around 2,20,000 units, he said.

The new venture, likely to be named Mitsubishi Truck, will be set up by the end of 2001 and employ around 6,000 people.

Johansson pointed to the complementary roles the two companies had, with Volvo's strength lying in heavy duty trucks and Mitsubishi's in small and medium-sized trucks.

For now the two plan to jointly develop medium-duty trucks and environmentally-friendly technology but will also explore further opportunities for joint development of buses and sharing distribution channels.

The agreement allows Volvo to fulfil its ambition to strengthen its position in Asia, with the new venture becoming the centre of its Asian operations for light and medium-duty trucks.

Volvo already has a truck plant in India and a joint venture in China.

For Mitsubishi Motors, burdened with a massive 1.77 trillion yen ($16 billion) in interest-bearing debt, Kawasoe highlighted the merits of cost-sharing, particularly for future research and development.

But the agreement left a question mark hanging over the future of Mitsubishi Motor's core passenger car division. It made 9,03,000 cars, including 660 cc minivehicles, and about 284,000 trucks and buses in the business year that ended in March.

President Kawasoe would not make explicit statements about the future of his firm's car operations after the deal with Volvo but said some non-profitable areas could be cut.

``In general, we will have to make choices and be more concentrated in our approach. Non-profitable sections should be cut,'' he said.

Analysts covering Mitsubishi said the deal was either slightly positive or even just neutral for the automaker, saying it would not help earnings prospects for a couple of years.

``Its truck operations are in the red but Mitsubishi has a strong tradition in trucks and personally I thought they could have stayed independent in the truck business,'' said Tsuyoshi Mochimaru, an analyst at Dresdner Kleiwort Benson.

``Rather, they still haven't got stuck into the most important area, passenger cars. I have a hold rating on the stock and that's the way it stays,'' he said.

Under Friday's deal, Mitsubishi Motors will allocate an issue of 48.52 million new shares worth 29.01 billion yen ($271 million) to Volvo, with the payment date on November 30, it said.

As part of the tie-up, Volvo will send one or two part-time directors to Mitsubishi's new truck and bus unit and Mitsubishi will do the same to Volvo's truck and bus business subsidiary.

Following the deal announced on Friday, Mitsubishi's outstanding shares will rise to 970.31 million, from 921.79 million as of September 30.

The Tokyo Stock Exchange temporarily suspended trade in Mitsubishi Motors until shareholders were informed of the deal. Before the announcement Mitsubishi Motors' shares had surged to end up by 11.88 per cent to 678 on speculation of a deal.