The LSE, which disclosed its plans in a statement released over the weekend, says it will offer 4.90 of its own shares, priced at £13.87, for each Borsa Italiana share. The deal values the Italian market operator at around EUR1.63bn, or EUR100.7 per share.

Borsa Italiana's board have backed the deal, despite a rumoured EUR1.5bn approach from US market operator Nyse Euronext. In a statement Angelo Tantazzi, chairman of Borsa Italiana, says the two exchanges are "contributing to the creation of the European financial marketplace, open to new participants and aimed at reaching a global dimension".

"We believe this combination is a real growth opportunity for offering new services to issuers, intermediaries and investors, benefiting from the sharing of competencies upon which both the exchanges have built their own success," adds Tantazzi.

LSE CEO Clare Furse says the merger is "all about accelerating our growth".

"Borsa Italiana's highly efficient businesses and expertise complement those of the London Stock Exchange extremely well," says Furse. "The combined group will have within it the capabilities and the additional scale, efficiency and diversity to provide what our markets want, thereby creating significant value for shareholders."

Furse is set to have the same role in the combined company, as will LSE chairman Chris Gibson-Smith. Tantazzi will become deputy chairman of the combined group while Borsa Italiana chief executive Massimo Capuano will become deputy chief executive of the new company and will be responsible for the integration of the two businesses.

The combined group will operate under a UK corporate governance structure with a board comprising twelve directors, seven of which will be nominated by the existing London Stock Exchange Group.

The LSE says the transaction is expected to be earnings neutral to positive in 2008 and earnings accretive by at least 10% in 2009.

The exchanges expect to achieve £40m a year in cost savings by 2011, with the bulk of these realised by providing the LSE's new TradElect platform to Borsa Italiana's cash equities market, consolidating overlapping operations and reducing combined corporate expenses. Cost savings will comprise an equal split of IT and non-IT related savings, says the statement.

But despite these assurances, LSE stock slumped 7.8% to 1250 pence in the opening minutes of trading on Monday morning after market analysts warned that the all-share deal could dilute the stakes of existing LSE shareholders.

Furthermore some analysts have speculated that Nasdaq - which is the LSE's biggest shareholder with a stake of just under 30% - may oppose the deal. Nasdaq built up its shareholding last year during a failed attempt to take over the UK market operator.

However LSE says it "believes it will have more than sufficient support from its shareholders for the merger".

In a separate move, London-based interdealer broker Icap is looking to buy electronic European government bond trading platform, MTS from LSE and Borsa Italiana and has appointed Lexicon Partners to advise it on a bid, according to a Financial Times report.

Borsa Italian currently owns 49% of Milan-based MTS but plans to exercise rights to purchase all the shares held by Euronext in MBE Holding, the joint venture company which owns MTS.

Icap's chief executive, Michael Spencer, told FT reporters that Icap "was far better equipped than the LSE to run the bond platform because it already had extensive similar, global electronic operations".

Spencer said an acquisition of MTS by Icap would "bring about the globalisation of the eurozone government bond market for the first time ever".

However the LSE is thought to have no plans to sell the bond trading platform, says the report, especially as one of its primary reasons for pursuing a merger with Borsa Italiana is to create a more diversified business and shift away from reliance on equity trading.