The announcement of the deal comes just a few days after the discussions about a long-mooted tie-up became public. Glencore already had a 34 per cent stake in Xstrata which employs about 5000 staff at its Mount Isa mines.

Under the deal, Xstrata shareholders would receive 2.8 Glencore shares for each of their shares. That represents a premium of 15.2 per cent based on Monday's closing prices.

The merger is projected to yield cost savings of $500 million in the first full year, primarily in marketing, while creating the world's fourth largest global diversified natural resource company, with operations in 33 countries.

It would be the world's third-largest copper producer, fourth-largest nickel producers and the global leader in thermal coal, ferrochrome and integrated zinc production.

"The commodities value chain is becoming longer and more complex, creating opportunities for a company that can pre-emptively participate at every stage," said Xstrata Chief Executive Mick Davis, who will become CEO of the merged company.

"Glencore Xstrata would be well positioned to do just that, creating value from resource extraction to customer sales and services, at a time when demand for our combined products continues to grow," Davis said.

Glencore CEO Ivan Glasenberg, who will take the titles of deputy CEO and president, said the merger represents "a fantastic opportunity to create a new powerhouse in the global commodities industry".

Xstrata shares were down 1.7 per cent in early trading in London; Glencore shares were up 1.1 per cent.

The merger agreement was announced as Xstrata reported a 22 per cent gain in full-year profit to $5.7 billion, compared with $4.7 billion a year earlier. Revenue was up 11 per cent to $33.9 billion.

Xstrata, based in Zug, Switzerland, was formed in 2002 when it bought Glencore's coal assets. The company mines copper in the Americas, zinc in Spain and ferrochrome and vanadium in Australia and South Africa.

Glencore is based in the Swiss town of Baar but has its main listing in London.

Glencore was founded in 1974 by Marc Rich, the fugitive trader who was controversially pardoned in 2001 by then US President Bill Clinton just hours before he left office.

Rich sold the company to its employees in 1994.